An overview of the tapered annual allowance

The tapered annual allowance came into being in April 2016, and since that time, more and more high income individuals are feeling the effects.  2019/20 is the first tax year when higher amounts of unused annual allowance from the pre-taper years will not be available to carry forward.   As a result, the taper is now likely to bite much harder for some high earners. It has even been suggested that doctors and senior NHS staff may start to reduce their working hours or refuse to work extra shifts to avoid falling foul of the taper and suffering an annual allowance charge. 

The taper applies to those whose adjusted income is more than £150,000 in a tax year, but does not affect individuals with threshold income of £110,000 or less, regardless of adjusted income.  HMRC guidance provides help on how to calculate the income thresholds.

It is important to remember that it’s not just earnings that are taken into account in working out if an individual is subject to the tapered annual allowance.  The starting point for both calculations is an individual’s total taxable income, after deducting any reliefs due under section 24 of the Income Tax Act 2007, which HMRC call “net income”.  The most common of the allowable deductions is member pension contributions.  Although gifts in the form of shares, real property and securities are deductible, gift aid payments may not be used to reduce income, although these may be used to restore the personal allowance and to mitigate any child benefit tax charge.  

The basic difference between adjusted and threshold income is that all pension contributions are included in adjusted income, but are excluded from threshold income.

If adjusted income exceeds £150,000, the annual allowance is reduced by £1 for every £2 of income above £150,000, subject to a maximum reduction of £30,000.  Therefore, for anyone with adjusted income of £210,000 or more, their tapered annual allowance will be £10,000. It is still possible to use carry forward if the taper applies; the tapered annual allowance should be substituted for the standard annual allowance in the calculations.

One of the ways to regain the full annual allowance for individuals who would otherwise be affected by the taper is to reduce the threshold income below £110,000 by making a member pension contribution.  Where taxable income is over £150,000, carry forward will need to be used to reduce total income sufficiently. For example:tion the full personal allowance of £12,500 can be recovered as the contribution has reduced earnings to below £100,000.  
 

Total taxable income

£155,000 (adjusted income)

Total taxable income

£20,000

Personal contribution paid

£60,000

Net taxable income

£95,000 (threshold income)

As the threshold income is now below £110,000 the tapered annual allowance does not apply.   In addition the full personal allowance of £12,500 can be recovered as the contribution has reduced earnings to below £100,000.  

  
Employer contributions must be added to the calculation of adjusted income.  For anyone with threshold income over £110,000, any employer contributions that increase income to more than £150,000 will immediately trigger the taper. 

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.

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