Pensions – watch out for the tapered annual allowance and carry forward..
Use it or lose it!
So what is the tapered annual allowance and what can be done to minimise its impact?
The maximum amount that people can contribute to a pension scheme and still obtain tax relief is currently £40,000 per annum.
As a reminder, from the 2016/17 tax year onwards, people with an ‘adjusted income’ over £150,000 will have their annual allowance reduced.
For every £2 of income they have over the £150,000, £1 of the pension annual allowance will be lost. The maximum taper is £30,000, which means that they will hit the minimum of £10000 once their adjusted annual income reaches £210k.
To complicate things further, if an individual’s ‘adjusted income’ varies each year between £150,000 and £210,000 so will their tapered annual allowance.
The definition of ‘adjusted income’ is all taxable income, which includes pension contributions. Unfortunately this means it isn’t possible to use salary exchange for pension contributions to bring the income figure below £150,000.
To add to the complexity even more there is an income floor which is called the ‘threshold income’. This floor is set at £110,000.
The definition is the same as adjusted income but crucially in this case it does NOT include pension contributions, so it is possible to reduce the threshold income below £110,000.
If threshold income is less than £110,000 tapering doesn’t apply. By making personal contributions to pensions it is therefore possible in some circumstances to avoid tapering completely.
For those prudent high earning pension investors, the amount contributed above the annual pension allowance has been steadily increasing since the introduction of the tapered annual allowance in April 2016.
It was widely reported in 2018 that HMRC’s total annual allowance breaches in 2016/17 came in at a whopping £561 million. This is triple the figure HMRC received in 2015/16.
If this trend continues which is likely and with the impact of the taper biting ever deeper, the figure for the 2017/18 and 18/19 is likely to increase even further.
That finally brings me on to carry forward.
It is still possible to use carry forward if an individual is subject to a tapered annual allowance.
Therefore, if there are any unused pension allowances in the preceding 3 tax years it is important to start planning now prior to the end of the current tax year on 05th April 2019.
Tapered annual allowance advice