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Phil Thomas
Senior Technical Support Consultant

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Tapering of annual allowance for high incomes - adjusted and threshold incomes

Published  11 November 2025
   14 min read

This reduces the annual allowance for people with an adjusted income over £260,000 and a threshold income over £200,000.

Key facts

  • The annual allowance is reduced for individuals who have ‘adjusted income’ over £260,000 a year.
  • The annual allowance reduces by £1 for every £2 over £260,000.
  • The maximum reduction is £50,000, this happens when 'adjusted income' is over £360,000.
  • The reduction does not apply to individuals who have ‘threshold income’ of no more than £200,000.

What is the difference between adjusted income and threshold income?

Definitions of adjusted income and threshold income are crucial to understanding if someone's affected by the tapered reduction.

Both include all taxable income - so this isn't restricted to earnings. Investment income of all types and benefits in kind, such as medical insurance premiums paid by the employer, will also be included. 

The difference is pretty simple; adjusted income includes all pension contributions (including any employer contributions), while threshold income excludes pension contributions.

Unfortunately, HMRC's definitions of adjusted and threshold income tend to cause a bit of confusion because they start with something called 'net income'. A common sense meaning of this would be 'income after tax', but it's not.

Net income in this context is all taxable income, minus various deductions. The most important (or at least the most common) of these deductions are personal contributions paid to money purchase and defined benefit occupational pension schemes, under the net pay arrangement. This is where the sponsoring employer of the pension scheme deducts employee contributions before tax under PAYE.

The other deductions include things like trade losses, share loss relief and certain gifts to charities.  A full list of the deductions can be found at s.24 of the Income Tax Act 2007.

Understanding the two definitions becomes easier if we consider taxable income from a more practical viewpoint. For example, when someone says, 'I earn £x', they don't usually mean the amount after the deduction of net pay arrangement contributions. We can therefore assume that when someone has earnings of £160,000 and pays contributions of £20,000 under the net pay arrangement, they'll say their earnings are £160,000, not £140,000. The £160,000 includes the pension contributions.

So, this is a good place to start when calculating adjusted income (which includes pension contributions). For threshold income, all personal pension contributions need to be deducted and you don't include employer contributions.

Threshold and adjusted income over the years

Individuals with a taxable income over the adjusted income will have their annual allowance for that tax year restricted. This means that for every £2 of income over the adjusted income, their annual allowance is reduced by £1. Their reduced annual allowance is rounded down to the nearest whole pound.

Dates
Threshold income
Adjusted income
Maximum reduction in annual allowance
Minimum annual allowance
6 April 2016 to 5 April 2020
 £110,000 £150,000 £30,000 £10,000
6 April 2020 to  5April 2023
 £200,000 £240,000 £36,000 £4,000
From 6 April 2023
 £200,000 £260,000 £50,000 £10,000

 

How do you calculate adjusted income and threshold income?

TAXABLE INCOME

(Include all earnings and investment income)

Deduct -

gross member contributions paid (whether under the relief at source method or net pay arrangement)

Add +

any employer contributions

Add +

any employment income given up through a salary exchange agreement set up after 8 July 2015

Deduct -

any taxed lump sum death benefits received

Deduct -

any taxed lump sum death benefits received

  

= Threshold income

= Adjusted income

Case studies

Take a look at our case studies to understand how the tapered annual allowance works in practice.

Case study 1 - Simon

TAXABLE INCOME

(Include all earnings and investment income)
Simon has employed income of £260,000 and rental income of £24,000 this tax year.

Deduct -

gross member contributions paid (whether under the relief at source method or net pay arrangement)

 

Simon contributes £15,000 to his group pension plan

Add +

any employer contributions

 

His employer contributes £30,000 to his group pension plan

Add +

any employment income given up through a salary exchange agreement set up after 8 July 2015

 

Doesn't apply

Deduct -

any taxed lump sum death benefits received

 

Doesn't apply

Deduct -

any taxed lump sum death benefits received

 

Doesn't apply

  

= Threshold income

Simon's threshold income is:

£260,000 + £24,000 - £15,000 = £269,000

= Adjusted income

Simon's adjusted income is:

£260,000 +£24,000 +£30,000 = £314,000
As the threshold income is over £200,000, the tapered annual allowance applies.

The reduction to Simon's annual allowance is:

(£314,000 - £260,000)/2 = £27,000

 

His annual allowance is therefore:

£60,000 - £27,000 = £33,000
Simon faces an annual allowance tax charge on £12,000 (£30,000 + £15,000 - £33,000) unless he has unused annual allowance to carry forward from previous tax years.

Case study 2 - Rex

TAXABLE INCOME

(Include all earnings and investment income)
Rex is self-employed with income of £260,000 this tax year. he also has dividends from his investments of £10,000.

Deduct -

gross member contributions paid (whether under the relief at source method or net pay arrangement)

 

Rex makes a single contribution of £75,000 into his personal pension plan this year, using carry forward.

Add +

any employer contributions

 

Doesn't apply as Rex is self-employed

Add +

any employment income given up through a salary exchange agreement set up after 8 July 2015

 

Doesn't apply as Rex is self-employed

Deduct -

any taxed lump sum death benefits received

 

Doesn't apply

Deduct -

any taxed lump sum death benefits received

 

Doesn't apply

  

= Threshold income

Rex's threshold income is:

£260,000 + £10,000 - £75,000 = £195,000

 

As this is below £200,000 the taper doesn't apply

= Adjusted income

As Rex's threshold income is below £200,000, the tapered annual allowance doesn't apply and there is no need to calculate his adjusted income.

Case study 3 - Ruby

TAXABLE INCOME

(Include all earnings and investment income)
Ruby is employed in the public sector with earnings of £320,000 this tax year and she's a member of her defined benefit scheme.

Deduct -

gross member contributions paid (whether under the relief at source method or net pay arrangement)

 

Ruby contributes £32,000, 10% of her earnings, into her defined benefit scheme.

Add +

any employer contributions

 

The contributions rate for her defined benefit scheme is 10% (£32,000).

Her pension input amount is £75,000. This is the closed value of her accrued pension minus her opening value increased by CPI.

The employer contribution is the pension input amount of £75,000 minus the employee contribution of £32,000 = £43,000

Add +

any employment income given up through a salary exchange agreement set up after 8 July 2015

 

Doesn't apply

Deduct -

any taxed lump sum death benefits received

 

Doesn't apply

Deduct -

any taxed lump sum death benefits received

 

Doesn't apply

 

= Threshold income

Ruby's threshold income is:

£320,00 - £32,000 = £288,000

= Adjusted income

Ruby's adjusted income is:

£320,000 + £43,000 = £363,000
As the threshold income is over £200,000, the tapered annual allowance applies.

As Ruby's adjusted income is over £360,000, her annual allowance is reduced to £10,000

She has no unused annual allowance from previous years, so she'll face an annual allowance charge at her marginal rate of tax on £65,000.

As the charge will be more than £2,000, she can ask the scheme to pay this on her behalf. They'll then reduce her benefits to cover the cost of the charge.

Case Study 4 - Sebastian

TAXABLE INCOME

(Include all earnings and investment income)
Sebastian has employed income of £290,000, a car allowance of £7,500, taxable savings interest of £2,000 and a redundancy payment of £50,000 this tax year.

Deduct -

gross member contributions paid (whether under the relief at source method or net pay arrangement)

 

Sebastian contributes £14,000 to his group pension plan

Add +

any employer contributions

 

His employer contributes £14,000 to his group pension plan

Add +

any employment income given up through a salary exchange agreement set up after 8 July 2015

 

Doesn't apply

Deduct -

any taxed lump sum death benefits received

 

Doesn't apply

Deduct -

any taxed lump sum death benefits received

 

Doesn't apply

  

= Threshold income

Sebastian's threshold income is:

£290,000 + £7,500 + £2,000 + £20,000* - £14,000 = £305,500

 

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

= Adjusted income

Sebastian's adjusted income is:

£290,000 + £7,500 + £2,000 + £20,000* + £14,000 = £333,500

 

*Only the taxable element of the redundancy payment above £30,000 is included in Sebastian's adjusted income calculation.
As the threshold income is over £200,000, the tapered annual allowance applies.

The reduction to Sebastian's annual allowance is:

(£333,500 - £260,000)/2 = £36,750

 

His annual allowance is therefore:

£60,000 - £36,750 = £23,250

Sebastian faces an annual allowance tax charge on £4,750 (£14,000 + £14,000 - £23,500) unless he has unused annual allowance to carry forward from previous years.

Case study 5 - Karen

TAXABLE INCOME

(Include all earnings and investment income)
Karen has employed income of £265,000 and a car allowance of £5,000 this tax year. Her employer pays a contribution of £20,000 to her pension scheme. She is also using a salary exchange agreement that was set up this year to pay her pension contributions of £20,000.

Deduct -

gross member contributions paid (whether under the relief at source method or net pay arrangement)

 

Karen's contributions are paid by salary exchange, so there are no member contributions.

Add +

any employer contributions

 

Her employer contributes £40,000 (£20,000 + £20,000) to her group pension plan

Add +

any employment income given up through a salary exchange agreement set up after 8 July 2015

 

£20,000 income given up as part of a salary exchange agreement.

Deduct -

any taxed lump sum death benefits received

 

Doesn't apply

Deduct -

any taxed lump sum death benefits received

 

Doesn't apply

  

= Threshold income

Karen's threshold income is:

£265,000 + £5,000 + £20,000 = £290,000

= Adjusted income

Karen's adjusted income is:

£265,000 + £40,000 + £5,000 = £310,000
As the threshold income is over £200,000, the tapered annual allowance applies.

The reduction to Karen's annual allowance is:

(£310,000 - £260,000)/2 = £25,000

 

Her annual allowance is therefore:

£60,000 - £25,000 = £35,000
Karen faces an annual allowance tax charge on £5,000 (£20,000 + £20,000 - £35,000) unless she has unused annual allowance to carry forward from previous years.

 

Employer contributions

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 £210,000. His employer’s normal pension contributions will amount to £40,000 so his adjusted income is £250,000. As this isn’t more than £260,000, he isn’t affected by the taper. His employer wants to pay an additional single pension contribution of £20,000 in the same tax year. His total contributions are within the standard annual allowance of £60,000 (he doesn’t have any carry forward to add to this) but the additional contribution increases Ryan’s adjusted income to £270,000.

As this is £10,000 over the limit, his annual allowance is reduced by £5,000 to £55,000. So, if the employer pays the additional contributions of £20,000, Ryan will have to pay an annual allowance charge on £5,000 as total pension contributions in the tax year will amount to £60,000.

So how much can the employer pay without creating an excess over the reduced annual allowance? The answer is £16,666. An additional employer contribution of £16,666 makes the adjusted income £266,666, £6,666 over the limit. The annual allowance is therefore reduced by £3,333 to £56,667, allowing the contribution to be paid without creating an annual allowance charge.

 

What are the anti-avoidance rules?

Anti-avoidance rules were put in place to stop people entering into a salary exchange or flexible remuneration arrangement after 8 July 2015 so they could receive additional pension contributions but reduce their adjusted or threshold income.

The anti-avoidance rules apply if:

  • it's reasonable to assume that the main purpose, or one of the main purposes, is to reduce the amount of their reduction under the tapered annual allowance for the current tax year, or two or more tax years which include the current tax year
  • they involve reducing adjusted income or threshold income for the tax year (or both)
  • they involve any of the reductions above, being cancelled out by an increase in the adjusted income, or threshold income, for a different tax year

If the anti-avoidance rules apply, the income used to calculate the reduction to the annual allowance for that tax year is the income before any adjustments were made.

Can you carry forward unused annual allowance if the taper applies?

Yes, it's still possible to carry forward unused annual allowance from previous years to a year where the taper applies.

However, the amount of unused annual allowance available when carrying forward from a year where the taper has applied will be the balance of the tapered amount.

See our carry forward of pension annual allowance article for more information on the rules.

The tapered annual allowance and the money purchase annual allowance.

If someone flexibly accesses their retirement savings, they're subject to the money purchase annual allowance.

People who have flexibly accessed their retirement savings will continue to have a money purchase annual allowance of £10,000. But where this applies, the alternative annual allowance (normally £50,000), which their defined benefit savings are tested against, will be restricted by the same taper.

Disclaimer

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.