Your Step by Step Guide to Understanding How the Tapered Annual Pension Allowance Rules Work
If your income is particularly high, you will lose some of your Annual Pension Allowance under the Tapered Annual Allowance rules.
To calculate your Tapered Annual Allowance you will need to understand the concepts of Adjusted Income and Threshold Income and apply these to your financial position.
If you exceed your Tapered Annual Allowance, this might not be a problem for you as you are allowed to Carry Forward any unused pension allowances from the previous three years.
If you exceed your Tapered Annual Allowance and all of your remaining Carry Forward allowance, you will be liable for a tax charge on the surplus.
To help you understand the Tapered Annual Allowance, we have also provided some worked examples.
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HOW DOES TAPERING OF THE ANNUAL ALLOWANCE WORK?
For the 2023/24 tax year, the UK maximum annual pension allowance (contribution) has increased from £40,000 to £60,000. This is good news.
However, for individuals with 'adjusted income' of over £260,000 p.a., this allowance is reduced or 'tapered' down.
Your tapered annual allowance is the amount of annual allowance you are left with after applying this reduction.
The reduction is £1 for every £2 of adjusted income over £260,000, with a maximum reduction of £50,000 once 'adjusted income' exceeds £360,000.
The reduction does not apply to individuals who have ‘threshold income’ of no more than £200,000.
Chris has total adjusted income of £400,000 p.a. This means that his tapered annual allowance will be £10,000 as he will suffer the maximum reduction of £50,000.
Sam has total adjusted income of £280,000 p.a. This means that her tapered annual allowance will be £50,000. This is because her income is £20,000 p.a. above the taper threshold of £260,000, meaning that she will lose £10,000 of the standard £60,000 allowance.
HOW ARE THRESHOLD AND ADJUSTED INCOME CALCULATED?
The full definition and calculation methodology for both threshold and adjusted income can be complex (see HMRC link at the bottom of this article), but as a guide we've included simplified definitions below:
The total of all of your gross (pre-tax) salary, bonus, investment income, savings interest, rental property income, benefits in kind such as medical insurance etc.
It’s all of your taxable income sources, not just your earnings from work.
Threshold income PLUS what your employer pays into your pension.
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