If your annual income is above £150,000, then your pension allowance has been subject to tapering since April this year. For every £2 of income over £150,000, your £40,000 annual 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 £10,000.
The new system is based on adjusted income, which includes pension contributions made by both the earner and their employer. This means that high earners may need a reduction of the contributions both they and their employer are making in order to avoid unnecessary taxation.
However, the system is made more complex through the consideration of threshold income, which does not include pension contributions. Anyone who earns a threshold income of £110,000 or less will not be subject to the tapered allowance. Both adjusted and threshold income are calculated by HMRC using net income, which takes into account all taxable income less certain reductions.
Taking into account the manner in which net income is calculated, which is then used to calculate both adjusted and threshold income, the tapering system is one which could potentially catch out high earners. It’s therefore a good idea to arrange a review with your financial adviser if you think your income is likely to be affected, as adjusting your pension contributions could help you avoid becoming subject to reductions. If you have any questions around this topic, please feel free to get in touch with us directly.