Ruby's employed in the public sector, with earnings of £275,000 this tax year and she is a member of her defined benefit scheme.
To calculate her threshold income, take her taxable earnings of £275,000 and deduct pension contribution she made to her defined benefit scheme of £34,375.
Ruby's threshold income is £275,000 minus £34,375 which equals £240,625. As Ruby's threshold income is over £200,000 her adjusted income needs to be calculated.
To calculate Ruby’s adjusted income, take her taxable income of £275,000 and add her employer pension contribution of £40,625. This is calculated by taking her pension input amount of £75,000.
This is the closing value of her accrued pension minus her opening value increased by CPI. The employer pension contribution is the pension input amount of £75,000 minus the employee contribution of £34,375 which equals £40,625.
Ruby's adjusted income is £275,000 plus £40,625 which equals £315,625. As her adjusted income is over £312,000 her annual allowance is reduced to £4,000.
She has no unused annual allowance from previous years, so she'll face an annual allowance charge at her marginal rate of tax on £71,000 (which is £75,000 minus £4,000). 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.