Chartered Tax Advisers & Accountants

Pension Contributions Tapered Annual Allowance

Published On: 01 April 2016
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As of 6 April 2016, yet another change came into effect regarding how much an individual can pay each year into a registered pension scheme.  This is known as the pension contributions annual allowance.  The change impacts individuals with adjusted income for the tax year above £150,000.  When that happens, the tapered annual allowance for pension contributions will be introduced.  This means for that for every £2 of adjusted income above the £150,000 limit, the annual allowance will be reduced by £1.  However, no matter taxable income levels, each individual will, in most circumstances, be allowed to pay a minimum contribution of £10,000.

Before applying the restriction for exceeding £150,000 of adjusted income, it is also necessary to consider threshold income.  This is applicable for those with threshold income of £110,000 or more.  If an individual does not exceed £110,000 the tapered allowance restriction will not apply.

Adjusted Income Vs Threshold Income

Given the differing limits and the impact this might have for an individual, it is important to know how each type of income in calculated.

Adjusted Income

Threshold Income

Taxable income (including earned and investment income), less qualifying deductions such as loss relief or charitable donations

 

Taxable income (including earned and investment income) , less qualifying deductions such as loss relief or charitable donations

Includes the value of any employer pension contributions made

Includes any amounts that have reduced employment income as a result of a salary sacrifice arrangement or flexible remuneration arrangement (made on or after 9 July 2015)

 

 

Deduct any gross member contributions made (either through the relief at source method or the net pay arrangement)

 

In addition, any taxed lump sum death benefits received should be deducted from both calculations above.

Carrying Forward Unused Annual Allowance

As before, it is still possible to carry forward any unused portion of the annual allowance from the three previous tax years.  However, when carrying forward any tapered annual allowances, it is only the balance of the tapered amount that can be claimed.

What if the Annual Allowance is Exceeded?

Where pension contributions in excess of the annual allowance are made, tax relief will be restricted and the excess will be subject to a tax charge at an individual’s marginal rate (most likely 45%).  This must be reported on your self assessment tax return.

Where the tax charge is more than £2,000, an individual can have the charge paid from the pension fund.

This is a complex area of tax and pension planning which can have an unexpected impact on some individuals.  Our recommendation is for proper advice to be taken if unwelcome and unexpected tax liabilities are to be avoided.