For most taxpayers the annual tax-free pensions allowance is £40,000. In 2016 the tapered allowance regulation was introduced, lowering this amount for high earners.
Who does tapered annual allowance apply to?
This regulation applies to individuals with a threshold income over £110,000 and adjusted income over £150,000. Threshold income is the individual’s net income for the year plus:
- rental income
- interest on savings
- less salary sacrifices
- and less pension contributions
Adjusted income is calculated using the threshold income plus the total pension input amount. If the adjusted income is over £150,000 you must calculate how much more your adjusted amount is than the threshold.
What does the tapered annual allowance mean for high earners?
In short, you could face tax penalties if you meet the income thresholds and pay over £10,000 into your pension. The taper works by reducing the allowance exceeding £150,000 down to £1 for every £2.
For example, if you earn £28,556 over the adjusted income you will divide this amount by 2 and deduct it from the usual £40,000 tax-free allowance. So, the calculation would be:
40,000 – (28,556 ÷ 2) = £25,722. Meaning pension contributions over this amount will be taxed.
How can I tax efficiently save for retirement?
If your pension savings are more than the annual allowance for the year you should utilise the ‘brought forward relief’.