Sebastian has employed income of £230,000, a car allowance of £7,500, taxable savings of £2,000 and a redundancy payment of £50,000, only £20,000 of this redundancy payment is taxable. So, his total taxable earnings are £259,500.
To calculate his threshold income, take his taxable pay of £259,500 and deduct a pension contribution of £14,000 he made to a group personal pension Sebastian’s threshold income is £259,500 minus £14,000 which equals £245,500. As Sebastian’s threshold income is over £200,000 his adjusted income needs to be calculated.
To calculate his adjusted income, take his taxable pay of £259,500 and add an employer pension contribution of £14,000. Sebastian's adjusted income is £259,500 plus £14,000 which equals £273,500.
The reduction to his annual allowance is £273,500 minus £240,000 divided by 2 which equals £16,750. This is deducted from the annual allowance of £40,000 leaving Sebastian with an annual allowance of £40,000 minus £16,750 which equals £23,250. Sebastian faces an annual allowance charge on £14,000 plus £14,000 minus £23,250 which equals £4,750 unless he has unused annual allowance to carry forward from previous years.