Tapered Annual Allowance: What is it and How Does it Work?
What is pension tapering?
Pension tapering affects how much individuals with high income can save into their pension each tax year while benefiting from tax relief.
The standard annual allowance for the 2023/24 tax year is £60,000. However, individuals with a high income could see their allowance tapered to a minimum of £10,000 depending on their total income for the tax year.
What is the tapered annual allowance for 2023/24?
From 6 April 2023 the tapered annual allowance affects people who have both a ‘threshold income’ of £200,000 or more, and an ‘adjusted income’ of £260,000 or more.
The tapering stops when ‘adjusted income’ reaches £360,000 and the annual allowance is then reduced to £10,000 that they can save into their pension each tax year while claiming tax relief.
To understand what ‘threshold income’ and ‘adjusted income’ mean see below.
When does the tapered annual allowance apply?
The tapered annual allowance only applies if you meet both of these criteria:
- Your ‘threshold income’ is £200,000 or more for the tax year, and
- Your ‘adjusted income’ is £260,000 or more for the tax year
If your ‘threshold income’ is less than £200,000 your annual allowance will not be reduced regardless of what your adjusted income is.
What is ‘threshold’ and ‘adjusted’ income?
Your ‘threshold income’ is your total net income, which is all income you received in the tax year. This includes rental income, bonuses, dividends, interest from savings, dividends from investments and benefits in kind. You should exclude pension contributions you have made in the tax year where tax relief has been granted by ‘relief at source’.
Your ‘adjusted income’ is the same as your total net income plus the value of any personal and employer pension contributions made in the tax year.
How does the pension taper relief work?
People who have a ‘threshold income’ of £200,000 or more and an ‘adjusted income’ of £260,000 or more, will see their annual allowance gradually reduced by £1 for every £2 of adjusted income over £260,000.
For example, if your ‘adjusted income’ is £280,000, your annual allowance will be reduced by £10,000. Here’s how it works:
£280,000 – £260,000 = £20,000 (the amount that exceeds the threshold)
£20,000 / 2 = £10,000 (£1 for every £2 of income that exceeds the threshold)
£60,000 – £10,000 = £50,000 (the annual allowance minus your tapered amount)
In this example your annual allowance for the tax year would be £50,000 instead of £60,000.
Does the tapered annual allowance affect carry forward?
If you are affected by the tapered annual allowance, you can still make use of the carry forward rules. Carry forward allows you to bring forward unused annual allowance from the three previous tax years.
The tapered annual allowance is calculated each tax year and can change from one year to the next based on the tax rules and how much income you receive each year. If you are carrying forward from a year where the taper applied, you can only carry forward any unused allowance based on your tapered allowance for that year.
For example, if your tapered annual allowance for a previous tax year was £30,000 and you contributed £20,000 to your pension, you can only carry forward the remaining £10,000.
Does tapered annual allowance apply to employer contributions?
Yes, the tapered annual allowance applies to all pension contributions, whether they are made by you or your employer.
What happens if I exceed my tapered annual allowance?
If you contribute more than your annual pension allowance, you will face an annual allowance charge on the excess at your highest marginal tax rate.
Calculating your tapered annual allowance
Calculating your adjusted and threshold income can be complicated. You can find more information about how to calculate your tapered annual allowance on the Government website here. You can also speak to a Financial Adviser and/or a tax specialist who has the right knowledge and experience to support you.
How Grayson Lewis can help
At Grayson Lewis Financial Planning we specialise in pension advice and we work with high income earners to help them grow and protect their wealth.
We offer a variety of financial planning services to support individuals, families and business owners in achieving their aspirations.
To learn more about how we could support you and for a no obligation consultation please get in touch.
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The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.