She has employed income of £265,000, a car allowance of £5,000, Her employer pays a £20,000 pension contribution plus another £20,000 via salary exchange in respect of her contribution. Her employment income after the salary exchange agreement is £265,000.
To calculate her threshold income, take her taxable pay of £265,000 add £20,000 in respect of the salary exchange agreement and add the car allowance of £5,000 which equals £290,000. As Karen's threshold income is over £200,000 her adjusted income needs to be calculated.
To calculate her adjusted income, take her taxable pay of £265,000 and add an employer pension contribution of £40,000 (£20,000 plus £20,000) then add £5,000 the car allowance. Karen’s adjusted income is £265,000 plus £40,000 plus £5,000 which equals £310,000.
The reduction to her annual allowance is £310,000 minus £240,000 divided by 2 which equals £35,000. This is deducted from the annual allowance of £40,000 leaving Karen with an annual allowance of £5,000. Karen faces an annual allowance charge on £40,000 minus £5,000 which equals £35,000 unless she has unused annual allowance to carry forward from previous years.