- High earnings can lead to a tapered annual allowance
- Further contributions can either reduce or increase a tapered annual allowance
- We have a calculator that can assist you with calculations
Key takeaways from this article
The tapered annual allowance is a reduced allowance for high earners. It works by decreasing the standard annual allowance once a client’s income exceeds both the threshold and adjusted income levels. Before we explain how to do a tapered annual allowance calculation, it is important you understand the terminology used in the the calculations – net income, theshold income and adjusted income.
1. Net income
Both the threshold income and adjusted income start with the client’s net income.
Net income, includes (but is not limited to):
- Income from employment (including benefits)
- Profits from self-employment
- Taxable social security benefits
- Pensions (including the State Pension)
- Savings, dividends, and rental income
It will not include (but is not limited to):
- Salary sacrifice
- Net pay arrangements
- The first £30,000 of a redundancy payment
Net income is fully defined in step 2 of the calculation in section 23 of the Income Tax Act 2007.
2. Threshold income
To calculate the client threshold income you start with client’s net income then
- ADD any salary sacrifice/flexible remuneration made on or after 9 July 2015,
- SUBTRACT gross personal contributions made into a relief at source scheme,
- SUBTRACT the amount of any taxable lump sum death benefit.
3. Adjusted income
To calculate the client adjusted income you start with client’s net income then
- ADD total employer contributions paid into a money purchase scheme
- ADD total personal contributions paid into a money purchase scheme via a net pay arrangement
- ADD the amount of any excess relief claimed via HMRC to a net pay arrangement
- ADD the gross contribution where a subsequent claim is made to HMRC for tax relief because the pension scheme does not offer relief at source or net pay arrangement
- ADD the pension input amount for a defined benefit or cash balance scheme
- SUBTRACT the amount of taxable lump sum death benefit
4. How to calculate the tapered annual allowance
The tapered annual allowance only applies if the client exceeds both the threshold and adjusted income levels. If only one of these limits are exceeded, no calculation is necessary. The threshold income level is £200,000 and the adjust income level is £260,000.
Step 1
Calculate the client’s threshold income. If it exceeds £200,000, proceed to Step 2.
Step 2
Calculate the client’s adjusted income. If it exceeds £260,000, proceed to Step 3.
5. Historical threshold and adjusted income levels
6. Carry forward
The tapered annual allowance calculation is specific to each tax year. Therefore, high-income individuals may need to perform this calculation for multiple years if they plan to use carry forward. Once you have determined the tapered annual allowances for each tax year, you can proceed with the carry forward calculation. We have a calculator that can help you do this calculation.
You will need to be careful when making further contributions. Personal contributions to a relief at source scheme will reduce the threshold income, potentially gaining back a full standard allowance. Employer contributions will increase the adjusted income, potentially causing a greater taper or even creating a taper that doesn’t exist before the new contribution.
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The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.