The tapered annual pension allowance for high net-worth individuals has caused concern as a large amount of high earning members of staff within the NHS are leaving their jobs, reducing their hours and opting out of the NHS pension scheme.

What is the tapered allowance?

The tapered allowance was introduced to restrict pensions tax relief for anyone that has an income of over £150,000 (including any pension contributions) or have an income in excess of £110,000 (excluding pension contributions).

If you are earning £150,000 then for every £2 of income over £150,000 of your annual allowance will be reduced by £1, the pre-tax taper is £40,000.

There is a maximum reduction of £30,000, so if your income exceeds £210,000 then you will have an annual allowance of £10,000.

You should be aware that if you are a high earner and your pension contribution exceeds your annual tax allowance then you are likely to be taxed.

If your income is £110,000 or less, then the taper will not apply to you

What do I need to know?

If you are unsure about if your annual allowance should be tapered, then you can work it out by working out your adjusted income and threshold income.

Your adjusted income includes all your employer contributions, but your threshold income excludes your pension contributions.

The starting point is for you to work out your net income, you must calculate all of your taxable income, not just your earnings.

Example:

If I have a taxable turnover of £110,000 and the company, I work for pays a £50,000 employer pension contribution on my behalf, then my adjusted income will be £160,000.

Because my adjusted income is over the £150,000 mark, the tapered annual allowance will come into effect and my annual allowance will be reduced by £5,000 to £35,000.

But the taper will not apply as my threshold income is £110,000, so my annual allowance will remain at £40,000.

Tax Planning

It is worth making sure that you maximise your pension contributions and carry forward any unused annual allowance from the previous three years where the taper applies.

Anti-avoidance measures

The government has brought in anti-avoidance legislation to stop high net-worth individuals entering into salary exchanges or flexible remuneration arrangements after 8 July 2015.

The arrangements provided individuals with a high net-worth to receive additional pension contributions and reduce their adjusted or threshold income.

If the arrangement meets the conditions set out in the anti-avoidance rules, then the individuals income adjustments will be used to calculate the annual allowance reduction.

Money purchase annual allowance

Retirement savers can access their pension pot from the age of 55.

You should know that the money purchase annual allowance (MPAA) will apply, which is at £4,000 for payments into defined contribution schemes.

If you are in a defined benefit scheme, then the alternative benefit scheme will apply. To calculate this the MPAA will be deducted from the standard annual allowance of £40,000, to produce an annual allowance of £36,000.

Further Actions

You should be aware that there may be changes to the rules that may apply to you, as the standard annual allowance may be reduced from £40,000 to £30,000, so it will affect the majority of taxpayers. 

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