In an attempt to control the cost of Pension tax relief, with effect from the 2016-2017 tax year, a reduced annual allowance became applicable to all Pension savings by or on behalf of a member depending on their level of taxable income within a given tax year.
On 6th April 2016 the government introduced the Tapered Annual Allowance for individuals with ‘Threshold Income’ of over £110,000.00 and ‘Adjusted Income’ of over £150,000.00.
In effect, this results in a reduced annual allowance for those with an ‘adjusted income’ of over £150,000.00. The reduction works by operating a £1.00 reduction in the annual allowance for every £2.00 of adjusted income above £150,000.00.
The maximum reduction is £30,000.00. So anyone with an income of £210,000.00 or more has an annual allowance of £10,000.00.
Definitions of ‘threshold income’ and ‘adjusted income’ are crucial to understanding whether or not an individual is affected by the tapered reduction.
The Threshold Income measure helps to provide certainty for individuals with lower salaries and to ensure this rule does not impact people who have large one-off employer funded pension contributions.
Where an individual has a ‘Threshold Income’ of £110,000.00 or less the tapered annual allowance will not be applicable and there would be no requirement to calculate ‘Adjusted Income’.
Threshold Income is broadly defined as ‘an individual’s net income for the year’. This will include all taxable income which is made up (but not exclusively) of; income from employment (including any benefits); profits from self-employment; taxable social security benefits; pensions (including the State Pension); and savings, dividend and rental income.
After ‘net income’ has been calculated, the grossed up amount of any Pension contribution (made by anyone other than the individual’s employer) subject to tax relief at source is deducted and any employment income given up via salary sacrifice (via an arrangement set up on or after 9th July 2015) is added and this provides the Threshold Income.
If any lump sum death benefits have been received and taxed as the recipient’s income then these too are deducted from the calculation.
If Threshold Income exceeds £110,000.00 then adjusted income must be calculated to work out the amount of any tapered annual allowance.
Again, broadly speaking, Adjusted Income includes all taxable income and all pension savings less certain reliefs. The ‘Adjusted Income’ definition adds in all employer pension contributions to prevent individuals from avoiding the restriction by exchanging salary for employer contributions.
This income level has been ‘adjusted’ to take into consideration employee contributions taken from gross pay under the net pay arrangement, employer contributions and salary/bonus sacrifice.
For individuals who are affected by the Tapered Annual Allowance it may be necessary to implement financial planning which have the ability to alter the impact of the taper.
PAS Financial Planning may be able to determine if Carry Forward can be used to reduce or negate the annual allowance excess amount and, as you can see from the content of this article, this is a complex area which requires careful consideration.
An advisory company such as PAS Financial Planning who specialise in Pension and Retirement Planning will be able to assist individuals in their aim of reducing taxation and utilising the valuable allowances available to them as permitted by HMRC.