Tapered Annual Allowance – use it or lose it!
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 £60,000 per annum unless they are already drawing part of their pension as taxable income in which case this allowance is reduced to £10,000 pa.
Taxpayers with an ‘adjusted income’ over £260,000 will have that £60,000 annual allowance reduced.
For every £2 of income they receive over the £260,000, £1 of the pension annual allowance will be lost.
To complicate things further, if an individual’s ‘adjusted income’ varies each year between 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 £260,000.
To add to the complexity even more there is an income floor which is called the ‘threshold income’. This floor is set at £200,000.
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 £200,000.
If threshold income is less than £200,000, 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 these annual allowance limits a few years ago.
All these limits generally change from year to year so calculating your actual allowance over a number of years can get extremely complicated.
Finally – 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 5th April 2024.
About Laurence Sanderson
Laurence has worked in the financial services industry since 1996 and joined Sterling & Law Group as an Independent Financial Adviser in October 2013. Laurence is based in Brentwood where he has lived for over 37 years.
Having worked in the financial services industry for over 24 years Laurence can offer you a wealth of experience. Laurence specialises in pensions, pension transfers and retirement planning which is becoming an ever more complex area of advice, but also covers investing and personal protection.