Individuals with adjusted income over £150,000 in the tax year could have their annual allowance reduced.
Employer pension contributions are included in the definition of adjusted income so for those affected by taper, it can become very difficult to calculate the maximum employer contribution that can be paid as the contribution paid affects the adjusted income. As a result, whatever maximum contribution is paid reduces the tapered annual allowance which reduces the maximum contribution that can be paid!
Here’s an example:
Ryan has earnings of £134,000 in 2018/19. His employer’s normal pension contributions will amount to £15,000 so his adjusted income is £149,000. As this isn’t more than £150,000 he isn’t affected by the taper. His employer wants to pay an additional single pension contribution of £20,000 in 2018/19. His total contributions are within the standard annual allowance of £40,000 (he doesn’t have any carry forward to add to this) but the additional contribution increases Ryan’s adjusted income to £169,000.
As this is £19,000 over the limit, his annual allowance is reduced by £9,500 to £31,500. So if the employer pays the additional contributions of £20,000, Ryan will have to pay an annual allowance charge on £4,500 as total pension contributions in the tax year will amount to £35,000.
So how much can the employer pay without creating an excess over the reduced annual allowance?
The answer is £17,000. An employer contribution of £17,000 makes the adjusted income £166,000, £16,000 over the limit. The annual allowance is therefore reduced by £8,000 to £32,000, allowing the contribution to be paid without creating an annual allowance charge.
If any of your clients are faced with this dilemma, speak to your usual Royal London contact.
Senior Technical Support Analyst
Jim has worked in Financial Services since 1969 with experience in training, sales training, consultancy work and technical support.