This reduces the annual allowance for people with an adjusted income over £150,000 and a threshold income over £110,000.
This is changing to £240,000 for adjusted income and £200,000 for threshold income as of 06/04/2020. This means that for every £2 of income they have over £240,000, their annual allowance is reduced by £1. Their reduced annual allowance is rounded down to the nearest whole pound.
The maximum reduction is £36,000. Anyone with adjusted income of over £312,000 will have an annual allowance of £4,000 from 6th April 2020. People with high income caught by the restriction may have to reduce the contributions paid by them and/or their employer or an annual allowance charge will apply.
However, the tapered reduction doesn’t apply to anyone with ‘threshold income’ of no more than £200,000.
What is “Adjusted Income” and “Threshold Income”?
Both include all taxable income – so this isn’t restricted to earnings. Investment income of all types and benefits in kind, such as medical insurance premiums paid by the employer, will also be included. The difference is simple; adjusted income includes all pension contributions (including any employer contributions), while threshold income excludes pension contributions.
THRESHOLD INCOME = All Taxable Income (including all earnings & investment income) plus Any income given up through Salary Exchange setup after 08/07/2015 minus Gross Member Pension Contributions
ADJUSTED INCOME (only applicable if threshold income above £200,000) = All Taxable Income (including all earnings & investment income) plus Employer Pension Contributions
Colin has a salary of £185,000 per annum from his company, a 10% pension contribution which he matches with a 10% personal contribution. Colin also has a Buy to Let Property that gives him a rental income of £25,000 per annum.
THRESHOLD INCOME = All Taxable Income (£185,000 + £25,000) plus Any income given up through Salary Exchange setup after 08/07/2015 (£0) minus Gross Member Pension Contributions (£18,500) =£185,000 + £25,000 +£0 – £18,500= £191,500
ADJUSTED INCOME (only applicable if threshold income above £200,000) = Not applicable as Threshold Income is below £200,000
Colin has a full pension annual allowance of £40,000 for the 2020/21 tax year. (plus, potentially carry forward from previous tax years.)
Tracey has a salary of £195,000 per annum from her company, a car allowance of £10,000, a 15% pension contribution which she matches with a 10% personal contribution. Tracey also has dividend income of £45,000 per annum.
THRESHOLD INCOME = All Taxable Income (£195,000 + £10,000 + £45,000) plus Any income given up through Salary Exchange setup after 08/07/2015 (£0) minus Gross Member Pension Contributions (£19,500) =£195,000 + £10,000 + £45,000 +£0 – £19,500= £230,500
ADJUSTED INCOME (only applicable if threshold income above £200,000) = All Taxable Income (£195,000 + £10,000 + £45,000) plus Employer Pension Contributions (£29,250) =£195,000 + £10,000 + £45,000 +£29,250= £279,250
Tracey’s adjusted income is £39,250 above £240,000 and therefore her annual allowance is reduced by £39,250/2 = £19,625. Tracey’s annual allowance for 2020/21 would be £20,375. As her total contributions are £48,750 she would face a charge on £28,375 of her contributions.
It’s still possible to carry forward unused annual allowance from previous years to a year where the taper applies.
However, the amount of unused annual allowance available when carrying forward from a year where the taper has applied will be the balance of the tapered amount.
If someone flexibly accesses their retirement savings, they’re subject to the money purchase annual allowance (MPAA).
People who have flexibly accessed their retirement savings will continue to have a money purchase annual allowance of £4,000. But where this applies, the alternative annual allowance (normally £36,000), which their defined benefit savings are tested against, will be restricted by the same taper.
Money purchase annual allowance (MPAA)
If someone’s subject to the MPAA as well as tapering, the taper reduces the ‘alternative annual allowance’ which applies to any DB benefits they may have. This is the standard annual allowance minus the MPAA of £4,000, so currently the alternative annual allowance is £36,000.
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