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Key takeaways from this article
- High earnings can lead to a tapered annual allowance
- Further contributions can either reduce or increase a tapered annual allowance
- We have a calculator that can assist you with calculations
The tapered annual allowance is a reduced allowance for high earners. It works by decreasing the standard annual allowance once a client’s income exceeds both the threshold and adjusted income levels. Before we explain how to do a tapered annual allowance calculation, it is important you understand the terminology used in the the calculations – net income, theshold income and adjusted income.
1. Net income
Both the threshold income and adjusted income start with the client’s net income.
Net income, includes (but is not limited to):
- Income from employment (including benefits)
- Profits from self-employment
- Taxable social security benefits
- Pensions (including the State Pension)
- Savings, dividends, and rental income
It will not include (but is not limited to):
- Salary sacrifice
- Net pay arrangements
- The first £30,000 of a redundancy payment
Net income is fully defined in step 2 of the calculation in section 23 of the Income Tax Act 2007.
2. Threshold income
To calculate threshold income you start with client’s net income then
- ADD any salary sacrifice/flexible remuneration made on or after 9 July 2015,
- SUBTRACT gross personal contributions made into a relief at source scheme,
- SUBTRACT the amount of any taxable lump sum death benefit.
3. Adjusted income
To calculate adjusted income you start with client’s net income then
- ADD total employer contributions paid into a money purchase scheme
- ADD total personal contributions paid into a money purchase scheme via a net pay arrangement
- ADD the amount of any excess relief claimed via HMRC to a net pay arrangement
- ADD the gross contribution where a subsequent claim is made to HMRC for tax relief because the pension scheme does not offer relief at source or net pay arrangement
- ADD the pension input amount for a defined benefit or cash balance scheme
- SUBTRACT the amount of taxable lump sum death benefit
4. How to calculate the tapered annual allowance
The tapered annual allowance only applies if the client exceeds both the threshold and adjusted income levels. If only one of these limits are exceeded, no calculation is necessary. The threshold income level is £200,000 and the adjust income level is £260,000.
Step 1
Calculate the client’s threshold income. If it exceeds £200,000, proceed to Step 2.
Step 2
Calculate the client’s adjusted income. If it exceeds £260,000, proceed to Step 3.
5. Historical threshold and adjusted income levels
- Threshold income - £200,000
- Adjusted income - £240,000
- Standard annual allowance - £40,000
- Maximum reduction - £36,000
- Fully tapered allowance - £4,000
- Threshold income - £110,000
- Adjusted income - £150,000
- Standard annual allowance - £40,000
- Maximum reduction - £30,000
- Fully tapered allowance - £10,000
6. Carry forward
The tapered annual allowance calculation is specific to each tax year. Therefore, high-income individuals may need to perform this calculation for multiple years if they plan to use carry forward. Once you have determined the tapered annual allowances for each tax year, you can proceed with the carry forward calculation. We have a calculator that can help you do this calculation.
You will need to be careful when making further contributions. Personal contributions to a relief at source scheme will reduce the threshold income, potentially gaining back a full standard allowance. Employer contributions will increase the adjusted income, potentially causing a greater taper or even creating a taper that doesn’t exist before the new contribution.
7. Examples
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Client scenario |
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Salary - £180,000 Rental income - £25,000 Dividends - £40,000 Employer contribution - £30,000 |
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Step 1 |
Step 2 |
Step 3 |
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Threshold income is £180,000 + £25,000 + £40,000 = £245,000 As threshold income exceeds £200,000 move to step 2 |
Adjusted income is £180,000 + £25,000 + £40,000 + £30,000 = £275,000 As adjusted income exceeds £260,000 move to step 3 |
The excess over adjusted income level is £15,000. Annual allowance is reduced by £1 for every £2 pounds over the adjusted income level. Therefore the £60,000 standard annual allowance is reduced by £7,500. This client’s tapered annual allowance is £52,500. |
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Further considerations |
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You may be able to get the client’s full annual allowance back if you can reduce the client’s threshold income. The threshold income can be reduced by making personal contributions. If the client were to make a personal contribution to a relief at source scheme of at least £45,000 this would mean the threshold income is not exceeded and therefore there is no tapered annual allowance. This client has a tapered annual allowance of £52,500 and has used £30,000. This leaves £22,500 allowance available. To make up the other £22,500 there would need to be at least £22,500 of carry forward available. If instead a further employer contribution is made, this would increase the adjusted income level which would increase the taper, meaning the amount available allowance will decrease. Please see the next example to see this in action. |
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Client scenario |
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State pension - £12,000 Salary - £52,000 Dividends - £218,000 Taxable death lump sum- £30,000 |
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Step 1 |
Step 2 |
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Threshold income is £12,000 + £52,000 + £218,000 - £30,000 = £252,000 As threshold income exceeds £200,000 move to step 2 |
Adjusted income is £12,000 + £52,000 + £218,000 - £30,000 = £252,000 As adjusted income doesn’t exceed £260,000 there is no tapered annual allowance |
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Further considerations |
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As this client has the full standard annual allowance, you might think that you could put in a £60,000 employer contribution to use up the annual allowance. However, by making that employer contribution, the client now has a tapered annual allowance. Please see below |
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Step 1 |
Step 2 |
Step 3 |
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Threshold income is £12,000 + £52,000 + £218,000 - £30,000 = £252,000 As threshold income exceeds £200,000 move to step 2 |
Adjusted income is £12,000 + £52,000 + £218,000 - £30,000 + £60,000 Employer contribution = £312,000 As adjusted income exceeds £260,000 move to step 3 |
The excess over adjusted income level is £52,000. Annual allowance is reduced by £1 for every £2 pounds over the adjusted income level. Therefore the £60,000 standard annual allowance is reduced by £26,000. This client’s tapered annual allowance is £34,000. |
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Further considerations |
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Although there was originally a £60,000 annual allowance available, making this contribution as an employer contribution has triggered a tapered annual allowance, resulting in a £26,000 annual allowance excess. This excess may be offset by carry forward. However, if no carry forward is available, there are typically three options to consider.
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Client scenario |
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Salary - £390,000 Benefits in kind - £10,000 Savings interest - £27,000 Bond withdrawal – 48,000 |
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Step 1 |
Step 2 |
Step 3 |
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Threshold income is £390,000 + £10,000 + £27,000 + £48,000 = £475,000 As threshold income exceeds £200,000 move to step 2 |
Adjusted income is £390,000 + £10,000 + £27,000 + £48,000 = £475,000 As adjusted income exceeds £260,000 move to step 3 |
The excess over adjusted income level is £215,000. Annual allowance is reduced by £1 for every £2 pounds over the adjusted income level. This would normally mean a reduction of £107,500 however there is a maximum reduction of £50,000. Therefore the £60,000 standard annual allowance is reduced by £50,000. This client’s tapered annual allowance is £10,000. |
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Further considerations |
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In this scenario it is not possible to regain the standard annual allowance without causing a tax charge. To reduce the threshold income to £200,000 a personal contribution of £275,000 would need to be made. Assuming no contributions have been made this year, or in the previous three tax years, the maximum annual allowance and carry forward is £200,000. Therefore, even though this client has sufficient relevant UK earnings to support a contribution of £275,000, doing so will cause an annual allowance tax charge. |
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Need more help?
Speak to our experienced team. You can reach them Monday to Friday, 8.30am to 4.30pm, by either calling 02380 726 010 or emailing:
- Pensions technical queries – pensionstechnical@quilter.com
- Life and trust technical queries - taxandtrusts@quilter.com
The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.
