Follow The Three Worked Examples Below to See How Your Tapered Annual Allowance Would Be Calculated
EXAMPLE 1- INCOME WITHIN TAPER (£260,000p.a. to £360,000p.a)
Let’s imagine that you are 50 and earning £310,000 p.a. in a senior employed position.
Unless you have had a sudden jump in your income, the Tapered Annual Allowance will have severely hampered your ability to save into a pension over recent years.
For the last three tax years (2022/23, 2021/22 and 2020/21) your tax-efficient contributions would have been restricted to just £5,000 p.a. This is because your Annual Allowance was reduced at a rate of £1 for every £2 of income above the adjusted income threshold, which was £240,000. Your income was £70,000 above this, meaning that your allowance was reduced by £35,000. This would have left you with just £5,000 that you could pay in.
You may well have negotiated some extra salary from your employer in lieu of pension contributions. Alternatively, you would have been exceeding the Annual Allowance each year on your employer’s pension contributions and suffering an annual tax charge.
The 2023/24 changes have left you with a much higher allowance as the tapering starts at £260,000. You’ll lose £25,000 of the new standard allowance of £60,000, leaving you with an allowance of £35,000 p.a.
That’s a big jump and could well mean that you can fully benefit from your employer pension arrangements again without a tax charge.
EXAMPLE 2 - INCOME ABOVE TAPER
Let’s imagine that you earn £360,000 or more.
For the last three tax years you have been limited to putting £4,000 p.a. into your pension. This is because the previous tapering gave £4,000 p.a. as the minimum contribution level, which applied once your income exceeded £312,000.
The current tapering still takes you down to the minimum because the new £60,000 allowance is lost at a rate of £1 for every £2 of income over the £260,000 but the new minimum is £10,000.
In the grand scheme of your finances, a jump from £4,000 to £10,000 probably won’t make much difference, but it’s an increase nevertheless!
EXAMPLE 3 - INCOME BELOW TAPER
Let’s imagine that your income is £150,000 and that whilst you spend most of your income, you’ve received an inheritance which means that you can move some money into your pension if it makes sense.
You’ve got the full £60,000 allowance available to you because you are not affected by the taper.
If you don’t make any pension contributions, the top £50,000 of your income is going to get well and truly clobbered.
This is because not only will you lose your tax-free Personal Allowance on your income between £100,000 and £125,140 (which gives an effective rate of tax of 60%) but you’ll also pay 45% income tax on your income from £125,140 to £150,000. This is because the 45% tax band has been widened in 2023/24 to drag more people into the additional rate tax net.
The end result of that is that your top £50,000 of income will suffer a colossal £26,271 of tax, leaving you with just £23,729. In other words, a 52.5% tax charge.
So, you have a choice. Do you want £23,729 in your pocket or £50,000 in your pension fund?
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