Examples of how the tapered annual allowance works

27 June 2016
We have received lots of queries on the tapered annual allowance and how it impacts different individuals. We thought we’d help by putting together a few case studies to show how it works in practice.

As a reminder, read our previous article on the Tapering of annual allowance for high incomes.

Annual allowance flowchart

*for a DB scheme, this would be the pension input amount less any employee contributions.

Simon

Simon has employed income of £150,000 and rental income of £24,000 this tax year.  His employer makes contributions of £30,000 to a GPP and Simon makes contributions of £15,000.

Simon’s adjusted income is £150,000 + £24,000 + £30,000 = £204,000.

Simon’s threshold income is £150,000 + £24,000 - £15,000 = £159,000.

The reduction to Simon’s annual allowance is (£204,000 - £150,000) / 2 = £27,000.

His annual allowance is therefore £40,000 - £27,000 = £13,000.  Simon faces an annual allowance tax charge on £32,000 (£30,000 + £15,000 - £13,000) unless he has unused annual allowance to carry forward from previous years. 

Rex

Rex is self-employed with income of £150,000 this tax year.  He also has dividends from his investments of £10,000.  He makes a single contribution of £55,000 to a PP this year using carry forward.

Rex’s adjusted income is £150,000 + £10,000 = £160,000.

Rex’s threshold income is £150,000 + £10,000 - £55,000 = £105,000.

As Rex’s threshold income is below £110,000, the taper does not apply.

Ruby

Ruby is employed in the public sector with earnings of £185,000 this tax year and is a member of a defined benefit scheme.  Her contribution rate at this level of earnings is 14.5% (£26,825).  Her pension input amount is £55,000.  This is the closing value of her accrued pension less her opening value increased by CPI.  See this article for more information.

Ruby’s adjusted income is £185,000 + £28,175= £213,175.  The employer contribution here is the pension input amount of £55,000 less the employee contribution of £26,825. 

Ruby’s threshold income is £185,000 - £26,825 = £158,175.

As Ruby’s adjusted income is over £210,000, her annual allowance is reduced to £10,000.  She has no unused annual allowance from previous years, so she will face an annual allowance tax charge at her marginal rate of tax on £45,000 as her pension input amount is £55,000.  She could ask the scheme to pay this on her behalf as the charge will be above £2,000.  The scheme would then make a reduction to her benefits.

Sebastian

Sebastian has employed income of £140,000, a car allowance of £7,500, taxable savings interest of £2,000 and a redundancy payment of £50,000 this tax year.  His individual and employer contributions to a GPP this year are 10% (£14,000) each.

Sebastian’s adjusted income is £140,000 + £7,500 + £2,000 + £20,000 + £14,000 = £183,500.

Sebastian’s threshold income is £140,000 + £7,500 + £2,000 + £20,000 - £14,000 = £155,500.

Only the taxable element of the redundancy payment above £30,000 is included in Sebastian’s definition of adjusted and threshold income.

The reduction to Sebastian’s annual allowance is (£183,500 - £150,000) / 2 = £16,750.

His annual allowance is therefore £40,000 - £16,750 = £23,250.  Sebastian faces an annual allowance tax charge on £4,750 (£14,000 + £14,000 - £23,250) unless he has unused annual allowance to carry forward from previous years.

About the author

Fiona Hanrahan

Senior Product Insight and Technical Support Analyst

Fiona has worked in financial services since leaving university in 1998 and has experience of working in technical support and product design as well as working as a financial planner. She’s a Chartered Financial Planner and a Fellow of the Personal Finance Society.

Last updated: 27 Jun 2016

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