Pension Tension Prevention
Another year-end deadline is looming which will affect most high earners whether employed or self employed. Below is an extract on the impact of Tapered Annual Allowance and its complexity on pension contributions;
Tapered Annual Allowance
Recent legislation introduced the possibility that the annual allowance of £40,000 could be tapered down to £10,000, should an individuals’ ‘Adjusted Income’ be more than £150,000. If Adjusted Income exceeds £150,000, then the annual allowance will be reduced by £1 for every £2 over £150,000, to a minimum allowance of £10,000 gross (for tax year 2016/17 and drops to £4,000 for tax year 2017/18).
Should anyone exceed the ‘individual personal allowance’, this will then result in a tax charge by HMRC.
Calculating adjusted income is a very tiresome and complicated exercise. However, as a broad outline, the requirement is to calculate the total taxable income, after allowable deductions, in line with ‘Income Tax Act 2007’ and add back;
- any employer based pension contributions
- pension contributions which reduce taxable income (i.e. retirement annuity contracts and Occupational schemes which operate the ‘Net Pay Method’) and
- any final salary accrual.
After calculating Adjusted Income, there is a further calculation, to determine if anyone is subject to tapering by calculating the ‘Threshold Income’. In this instance there is no requirement to add back any pension contributions which reduce taxable income (apart from contributions arising from salary sacrifice arrangements, created on or after 9th July 2015) or employer contributions and final salary accrual’, and a deduction is made to account for any gross personal pension contributions, which will help to arrive at the Threshold Income.
If the Threshold Income is below £110,000, then the annual allowance is not subject to tapering.
If you, your colleagues, friends or your clients need any further specific advice, please do get in touch with Jamie Small on firstname.lastname@example.org or on 01727 837128