The Government has introduced the tapering of the annual contribution allowance for high incomes. This may affect you and you may need to obtain advice.
The tapered annual allowance is intended to reduce the amount of income tax relief available to higher earners who make pension contributions and to reduce the amount of government spending on pension tax relief.
Although the annual allowance remains at £40,000, from 6 April 2016 a tapered annual allowance applies to higher earners. Individuals who have an adjusted income greater than £150,000 and whose threshold income is greater than £110,000 will see their annual allowance reduced. For every £2 of adjusted income over £150,000, their annual allowance will be reduced by £1, subject to a remaining annual allowance of not less then £10,000. In other words, anyone subject to the taper whose adjusted income is £210,000 and over will have an annual allowance of £10,000.
Adjusted income includes
- all taxable income, which includes employment income, most pension and savings interest income plus any share, rental or trust income, less certain reliefs;
- the value of employer pension contributions;
- the amount of any excess relief on personal contributions to a net pay scheme;
- the amount of any pension contributions deducted from pay in relation to a net pay scheme;
- certain relief claimed by non-domiciled individuals in relation to contributions to overseas pensions schemes, less
- the amount of certain lump sum death benefits.
Threshold income includes
- all taxable income;
- any salary sacrificed in return for pension contributions on or after 9 July 2015, less
- the gross amount of any relief at source contributions and the amount of certain lump sum death benefits.
If you’re subject to the money purchase annual allowance (MPAA) rules because you’ve flexibly accessed benefits under a money purchase arrangement since 6 April 2015 (or had a flexible drawdown plan at any time before 6 April 2015), the amount that can be paid by or for you into money purchase arrangements without incurring a tax charge will be restricted to the MPAA, even where the tapered annual allowance also applies to you.
- With effect from 6 April 2017 the MPAA limit was reduced from £10,000 to £4,000. If you think you’re affected by these limits please speak to a financial adviser
If you feel your total earnings exceed £110,000, you need to check that you do not have adjusted income over £150,000. If you have total adjusted earnings over £150,000 you could incur the annual allowance tax charge. You are responsible for ensuring you pay any annual allowance tax charge due. This will not be automatically done by HMRC, your employer or your pension provider.
What You Need To Do
Be aware of these changes and how they might affect you. Take action if needed.