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Richard Porter, IFA St Albans - Pension allowances explained for high earners

Tuesday 31 October, 2017

Tapering Explained

From 6 April 2016, individuals who had ‘adjusted income’ (total taxable income including all pension contributions) for a tax year of greater than £150,000 had their standard annual allowance (£40,000) for that tax year restricted. 

The restriction works such that for every £2 of income they had earned above £150,000, their annual allowance was reduced by £1. 

The maximum reduction was £30,000, so the annual allowance for anyone with income of £210,000 or more would be £40,000-£30,000 = £10,000. 

‘Adjusted income’ Examples

Example 1

In the 2016-17 tax year Jane earns an annual salary of £150,000 and her employer pays £25,000 in to her pension making a total adjusted income of £175,000.

The income exceeds the £150,000 limit by £25,000 so the £40,000 annual allowance is reduced by £12,500 (half of £25,000) so she can only make or (have made on her behalf by an employer for example) pension contributions up to £27,500 without suffering a tax charge. 

Example 2

In the 2016-17 tax year Sally receives an annual salary of £205,000 and her employer contributes £30,000 into her pension.  She also receives £10,000 income from her investment portfolio.  The total is £245,000 which is £95,000 more than the £150,000 limit so her £40,000 annual allowance will be reduced to the minimum £10,000, as her income and employer pension contributions are greater than £210,000.  Sally can now only make (or have made on her behalf) contributions up to £10,000 without suffering a tax charge.

Explanation of ‘Threshold income’

The income floor of £110,000 is called ‘threshold income’ – which is defined in the same way as adjusted income but without including any pension contributions. This figure is to ensure that individuals aren’t affected by the taper purely as a result of a large pension contribution. 

Where an individual has threshold income of £110,000 or less, they will not be subject to the tapered annual allowance even if their adjusted income is greater than £150,000.  Some people may be able to make a personal contribution to a pension in order to reduce threshold income to £110,000 or less and will be able to avoid their annual allowance being tapered.

 What is included as ‘adjusted income’?

• The total amount of income for the tax year on which an individual is subject to income tax - which includes salary, bonus, profits from self-employment, benefits in kind, pension income (including uncrystallised funds pension lump sum), profits from renting out property, savings income (even if falling within the personal savings allowance), dividend income (even if falling within the dividend allowance), taxable elements of redundancy payments, chargeable gains (before top-slicing). Less certain allowances and reliefs, e.g. gifts to charities and trade losses

• Plus any employee pension contributions deducted from gross salary (net pay arrangements) if not included as income above. 

• Plus the value of any employer contributions

• Less any taxable lump sum death benefits

What is included as ‘threshold income’?

• The total amount of income for the tax year on which an individual is subject to income tax, as described above (any ‘net pay’ employee contributions must not be included in this figure)

• Less certain allowances and reliefs, e.g. gifts to charities and trade losses

• Less any contribution made by an individual to a relief at source pension (e.g. the gross amount of a contribution to a Group Personal Pension, Personal Pension Plan or Self Invested Personal Pension)

• Less any taxable lump sum death benefits

• Plus the amount of any employment income given up for pension provision as a result of any salary sacrifice or relevant flexible remuneration arrangement made on or after 9th July 2015. 

Carry forward allowance

It is still possible to use carry forward if subject to a tapered annual allowance. The maximum available amounts of unused relief remain at:

£50,000 for 2013/14

£40,000 for 2014/15

£40,000 for 2015/16

£40,000 for 2016/17

Tapering Example with carry forward

If Brian hasn’t paid any contributions to his personal pension since 2011/12 and is subject to the maximum amount of tapering in 2017/18, in that tax year his maximum contribution (without suffering a tax charge) is £40,000 + £40,000 + £40,000 + £10,000 = £130,000.

Assuming he can’t afford to maximum fund that year and only pays £5,000 in contributions in 2017/18, then in 2018/19 with a tapered annual allowance again of £10,000, his maximum contribution is £40,000 + £40,000 + £5,000 + £10,000 = £95,000. 

Please note that if a person was subject to the tapered annual allowance in 2016/17 they can only carry forward the balance of the unused tapered annual allowance figure.  

From 2017/18 onwards, the amount that can be carried forward from any tax year in which the taper applied is the balance of the tapered annual allowance amount.

Money purchase annual allowance

Anyone who has flexibly accessed their defined contribution pension savings (and is therefore subject to the £4,000 money purchase annual allowance) and who is also an active member of a defined benefit scheme, can have their £36,000 alternative annual allowance reduced by the taper rules. This means that for those with incomes of £210,000 or more, they will have an alternative annual allowance of £6,000 although any available used annual allowance can be carried forward and added to this. 

Richard Porter independent financial adviser and member of the St Albans financial planning team said:

‘These pension funding rules are complicated but it is really important our clients understand what they can and can’t do in relation to funding their pension.  We have found our clients want to invest their full pension annual allowance and reclaim their maximum pension tax relief.  They also want us to check they have used up any carry forward allowances.  However, we are finding clients are confused regarding the calculation of adjusted and threshold income, particularly when deciding whether particular types of income need to be included. The position on carry forward when the taper applies also creates a number of queries.  Some people may not know what their final earnings and other income will be until after the tax year has ended and therefore won't know where they fall within the taper range which means it is difficult to know how much their maximum tax relievable pension contributions can be for any year.   If anyone is unsure whether these rules apply to them I would recommend you contact us and speak to one of our independent financial advisers, we offer a free one hour consultation.’

 ‘The Financial Conduct Authority does not regulate tax planning’

Richard Porter, Independent Financial Adviser Lonsdale Services St Albans

Richard Porter, Independent Financial Adviser Lonsdale Services St Albans

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