The Annual Allowance – the maximum amount that can be invested into your pension while still receiving tax relief – is capped at £40,000. However, on 6th April 2016, the government introduced the new ‘Tapered Annual Allowance’ for individuals with ‘adjusted income’ of over £150,000 and ‘threshold income’ of over £110,000.
This means that for every £2 over £150,000 you lose £1 of your Annual Allowance, up to a maximum reduction of £30,000. As a result, anyone with income of £210,000 or more will have an Annual Allowance of only £10,000 per annum.
Although these measures are likely to impact relatively few people, the rules are complicated and it would be wrong for people earning less than £150,000 to assume they will not be affected.
Calculating ‘adjusted income’ and ‘threshold income’
The definitions of the two incomes are crucial to understanding whether an individual is affected by the new Tapered Annual Allowance.
Put simply, ‘adjusted income’ and ‘threshold income’ both include all taxable income – earnings, investment income of all types and benefits in kind such as medical insurance premiums paid by the employer.
However ‘adjusted income’ also includes both employer and employee pension contributions while ‘threshold income’ doesn’t.
For example, John runs his own company and is the sole shareholder. He has a taxable income of £100,000 plus employer contributions of £60,000 (using carry forward from previous years to avoid an annual allowance charge). This makes his ‘adjusted income’ £160,000, which pushes him over the £150,000 limit. However, John’s ‘threshold income’ is only £100,000 so the tapered reduction does not apply.
Another example is Steve who has a salary of £100,000. He receives rental income of £25,000 plus £5,000 from dividends and £5,000 from interest. This makes his total ‘threshold income’ £135,000. He then has a pension contribution of £25,000, which brings his ‘adjusted income’ to a total of £160,000. As a result, John is £10,000 over the threshold which means he will face a £5,000 reduction in his Annual Allowance.
Individuals who will be affected by the taper can carry forward any allowances from the previous three tax years in order to make additional tax-free pension savings.
- Annual Allowance for 2013/14 – £50,000
- Annual Allowance for 2014/15 – £40,000
- Annual Allowance for 2015/16 – £40,000
If you are a high earner and you think the introduction of the ‘Tapered Annual Allowance’ will impact you, please contact Calculis on 01794 525500 to organise a free no obligation meeting to discuss your options and to help you plan ahead.