Tapering of annual allowance - Karen

This image shows the position for Karen

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.

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.