Tapered Annual Allowance
In this Guest Editor article, Helen Morrissey from Utmost Wealth Management reminds us of the current considerations around Tapered Annual Allowance almost a year since changes were introduced in April 2016.
Tapered Annual Allowance
In normal circumstances, you can make a gross pension contribution of up to £40,000 per annum and receive income tax relief assuming your earnings are high enough. However, since 6th April 2016 the pension annual allowance can be reduced down as far as £10,000 if your “adjusted income” is high enough. We are now obviously approaching the end of the first tax year in which this system has applied. However, the level of your tapered annual allowance may have been a mystery until now, the latter part of the tax year.
In determining the tapered annual allowance, there are two measurements that need to be considered – threshold income and adjusted income.
If threshold income exceeds £110,000 then adjusted income must be measured. The very broad definition of threshold income is gross income from all sources after deduction of certain allowances and reliefs such as trading losses & charitable giving. Income will obviously include interest, rental income, salary, bonus, dividends, pension income etc.
If threshold income is £110,000 or less, you retain your £40,000 allowance in 2016/17 (assuming you have not triggered the money purchase annual allowance by drawing flexible benefits from your pension plan). If threshold income is more than £110,000, then the level of your adjusted income needs to be tested and this will decide whether any annual allowance is lost.
If this exceeds £150,000, the annual allowance is tapered downwards based upon the excess on a two for one basis. Once adjusted income reaches £210,000, the annual allowance has been fully tapered from £40,000 down to £10,000 per annum.
The broad definition of adjusted income is very similar to threshold income but also includes the value of any pension savings you are making personally, or that your employer is making on your behalf. In short, pension savings are included in addition to other income. If the result of the adjusted income test is greater than £150,000, then tapering of the annual allowance will apply.
- If your threshold income is £110,000 or below, you potentially have a £40,000 annual allowance.
- If your adjusted income exceeds £210,000 you have an annual allowance of £10,000 and have been fully tapered.
- If your adjusted income puts you in the “taper zone” between £150,000 and £210,000 you may not know what your annual allowance is until the latter part of the tax year when your total income position becomes clearer.
It’s now time to begin some “final” calculations to ascertain what the total scope for pension contributions is for the 2016/17 tax year. In addition, remember that unused annual allowances can potentially be “carried forwards” from the three earlier tax years if your earnings are high enough, generating greater levels of tax relief.
As we’ve seen, the two measurements take into account income from all sources. Therefore, existing investment choices that produce income could potentially be impacting upon the amount that can be paid into your pension.
It should be borne in mind that non-income producing investments, such as investment bonds, are available to provide the investment exposure and diversification required, without the knock on effect to your pension affairs.
Article contributed by Helen Morrissey at Utmost Wealth Solutions www.utmostwealth.co.uk
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