Sheila Tindle, Sanlam’s Head of Office in Teesside explains what higher earners need to consider when making pension contributions
The tapered annual allowance was first introduced in 2016 when the government said it was necessary to further tax higher earners to ‘deliver a fair system and protect the public finances’. Since then, it has been hitting the headlines with claims that it has doubled the amount of tax paid by public sector workers who have generous pension provision.
What is the tapered annual allowance?
The annual allowance is a limit to the total amount of contributions that can be paid to defined contribution pension schemes and the total amount of benefits that you can build up in defined benefit pension scheme each year, for tax relief purposes. The annual allowance is currently capped at £40,000. However, if you are a higher earner, the annual allowance will ‘taper’ by £1 for every £2 of additional income above £150,000 subject to a maximum reduction of £30,000 – and your salary, bonus, redundancy payments, income from property, dividend income, etc. are taken into account when calculating your income. This could have the effect of reducing your allowance to as little as £10,000, which would mean a hefty tax bill if you have made pension payments in excess of that.
From this year it could bite people harder
If you had not used up your annual allowance in previous tax years, you can carry the allowance forward. This tax year – 2019/20 – is the first year when the tapered allowance may apply to all three previous tax years. So, it’s now likely to bite more people much harder. We can expect to see many public sector workers with generous pensions working fewer hours and refusing overtime so as not to breach their annual allowance. This especially affects senior, experienced doctors.
Do you have any tips for preserving your pension allowance?
If your salary is around £100,000, you are approaching the ‘taper zone’; you should have a chat with your employer about salary, any bonuses and the pension contributions they make – just to check on which side of the threshold you fall. One of the ways to regain the full annual allowance for individuals who would otherwise be affected by the taper is to ensure your total income is below £110,000. A financial adviser can help with that.
Is there anything else to be aware of?
You should remember that it is only possible to refund pension contributions in limited circumstances – for example, where the amount paid by an individual or third party exceeds relevant UK earnings. It is not possible to refund a pension contribution purely because it results in the annual allowance being exceeded. You need to plan ahead and know where you stand before you make your pension contributions; otherwise, you could end up with a nasty surprise.
How can Sanlam help?
Sanlam provides a holistic financial planning service, which helps high earners and others to navigate the complexities of the tax system.
Request a call-back from a Sanlam planner who can help you to stay in control of your finances with your unique tax position in mind.
Based on our understanding of HMRC practice as at July 2019. Tax rules are subject to change.