Tapering of annual allowance - Sebastian

This image shows the position for Sebastian

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.

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.