MAXIMISING PENSION CONTRIBUTIONS AND THE TAPERED ANNUAL ALLOWANCE
As we start to approach the end of the tax year, the clock starts ticking for maximising contributions into tax exempt wrappers. Whilst the standard annual allowance of £60,000 is available to most clients making pension contributions, some individuals will have lower allowances. For example, clients who have flexibly accessed their pension benefits could find themselves subject to the money purchase annual allowance (MPAA) of £10,000. Those receiving income above certain thresholds will be considered “high income individuals” and be subject to the ‘tapered’ annual allowance.
The tapered annual allowance has now been in place for nearly ten years. It was first introduced in April 2016 when the standard annual allowance was £40,000 and the adjusted income limit where the taper began to bite was set at £150,000. The income limits received a significant increase in April 2020 and a further increase in April 2023 and it now sits at £260,000.
Historic Annual Allowance and Income Limit
| Tax Years | Standard Annual Allowance | Threshold Income Limit | Adjusted Income Limit | Minimum Tapered Allowance |
|---|---|---|---|---|
| 2016/17 – 2019/20 | £40,000 | £110,000 | £150,000 | £10,000 |
| 2020/21 – 2022/23 | £40,000 | £200,000 | £240,000 | £4,000 |
| 2023/24 – 2025/26 | £60,000 | £200,000 | £260,000 | £10,000 |
To be considered a “high income individual” and subject to the taper the client’s income for the relevant tax year must meet both of the following criteria:
- Threshold Income is over £200,000: This is essentially total taxable income minus personal pension contributions. Note, if personal contributions are paid under the net pay arrangement, these will not form part of an individual’s taxable pay on a P60 and so will already be excluded. Note any pension contributions paid under salary sacrifice agreement set up after 8 July 2015 must be added to threshold income.
- Adjusted Income is over £260,000: This is your total taxable income plus the value of all pension savings (including employer contributions). For defined benefit schemes the employer contributions are based on the employer’s share of the Pension Input Amount. This amount must also include any lump sum death benefits that have been subject to income tax.
Note that it is not just earned income that needs to be included in the calculations but all income subject to UK tax, including benefits in kind, trading profits, property, savings and dividend income.
Once both income thresholds are breached, the standard £60,000 allowance is reduced.
- Reduction rate: £1 of annual allowance is lost for every £2 of adjusted income above £260,000.
- Range: This continues until adjusted income reaches £360,000, at which point the maximum reduction of £50,000 has been applied.
- Minimum allowance: The tapered annual allowance cannot fall below £10,000.
So, adjusted income between £260,000 and £360,000 gives an effective allowance between £60,000 and £10,000; above £360,000 the allowance is fixed at £10,000.
From a planning perspective it is worth noting that the taper only applies if both limits are breached. Large employer contributions will therefore not be relevant if threshold income is not breached.
Also, individuals can pay contributions into a personal pension plan and, as these are subject to relief at source, they will reduce threshold income and potentially remove or reduce the impact of the taper. It should also be remembered that member contributions are also subject to the ‘annual limit’. You can fund more information on how this works here.
Individuals subject to the taper are not prevented from using carry forward and the rules work in a similar way to the standard annual allowance. The difference is that the maximum amount available to be carried forward will be based on the tapered allowance for that particular year. For any years where the taper did not apply the carried forward will still be based on the unused standard annual allowance.
For clients whose pension input exceeds their tapered annual allowance and any available carry forward, the annual allowance charge will apply on the excess. Pension providers automatically provide statements to clients whose pension input exceeds the standard annual allowance, but there is no requirement to issue these statements unless contributions exceed £60,000 (or £10,000 if the client is subject to the MPAA).
Monitoring contributions to Transact pensions is easy and current and previous pension input is displayed on Transact Online under Reports – Contributions to Transact Pensions, with more detailed analysis provided via a downloadable spreadsheet.
As with clients who exceed the standard annual allowance, we are usually able to offer ‘scheme pays’ in relation to tax charges that arise on pension contributions in excess of the tapered annual allowance. For more information on requesting scheme pays or on the standard allowance, please read this article which can be found on our new Transact Technical Centre webpage here.
If you have any questions, please feel free to contact the Technical Services team.
All information is based on our understanding and interpretation of applicable law and regulation which is subject to change. Tax treatment depends on individual client circumstances and may change in the future.