Skip to main content
search
Consumer Finance

Beware the tapered annual allowance trap …

By March 17, 2017 October 22nd, 2020 No Comments
Consumer Finance

Beware the tapered annual allowance trap …

By March 17, 2017 October 22nd, 2020 No Comments

The tapered annual allowance came into effect last April and applies to you if your total annual income (salary/bonus/dividends/rental income/benefits in kind etc) is over £110,000 (this is known as ‘threshold income’) AND your total annual income plus the total amount of pension contributions (from both employer and employee) is in excess of £150,000 (this is known as ‘adjusted income’).

Prior to the introduction of the tapered annual allowance, anyone investing into a pension received tax relief on annual contributions up to the Annual Allowance. When initially introduced in 2006, this was set at a level of £215,000 and after initially increasing in stages to an amount of £255,000 it has subsequently been reduced to the current level of £40,000. However, with the introduction of the new system of a tapered annual allowance, this figure has been significantly reduced for ‘high earners’.

As an illustration, for every £2 of income over £150,000, your £40,000 annual pension allowance is reduced by £1, with the reduction rounded down to the nearest whole pound if necessary. Reductions are capped at £30,000, meaning that those with incomes of £210,000 or above will receive a yearly allowance of just £10,000 which cannot fall any further.

There’s a common misconception, however, that the new system only affects those who earn over £150k but it’s important to be aware that if you benefit from a high level of pension contributions, you will still be affected by it, as long as your total earnings are in excess of £110,000.

As the adjusted income figure includes pension contributions made by both the earner and their employer, high earners may need to review their contributions in order to avoid unnecessary taxation.

As outlined, the rules are complex so forward planning is crucial. If you think your income is likely to be affected, it’s worthwhile arranging a review with your financial adviser to see how your pension contributions could be adjusted to help you avoid becoming subject to reductions. If you do exceed your annual allowance, another option is to “carry forward’’ leftover annual allowances from the previous three tax years to increase your allowance for the current year.

At Creative Wealth Management, we have considerable experience in working with high earners on these issues so if you have any questions, do please get in touch with us via your current Creative Financial Planner or through info@creativewm.co.uk.