Tapered annual allowance

If affected, the £60,000 allowance will reduce by £1 for every £2 of adjusted income received over £260,000 (£240,000 for years prior to 2023/24). However, the tapering of the allowance stops at £360,000 (£312,000 for years prior to 2023/24) and so everyone will retain an allowance of at least £10,000 (£4,000 for years prior to 2023/24).

Depending on your client’s income, this may happen for each tax year from 2016/17 onwards and the amount of tapering may be different for each tax year. A record should be kept of the tapered annual allowance for each year it impacts your client to help determine carry forward amounts and if an annual allowance charge applies.

The figures in the above table are for illustration purposes only. In practice the reduction in the allowance as a result of tapering will not reduce by £5,000 increments.

This depends on their annual income as defined by two measures.

For the 2024/25 tax year, their annual allowance will only be reduced if both of the following occur in a tax year:

• Their ‘threshold income’ is above £200,000 and
• Their ‘adjusted income’ is over £260,000

Working out the threshold and adjusted income is rather complicated but we have shown how you can calculate these figures further down the page. You will need to reassess your client's position on a yearly basis.

The first step is to calculate the threshold income because if this is £200,000 or below your client will not be subject to the tapered annual allowance and does not need to worry about the adjusted income.

Firstly, add up all the following:

• Your client’s salary (do not include any pension contributions made through salary sacrifice)*
• Any bonuses, commission and any benefits in kind
• Income from property
• Dividend payments and interest from saving
• Any self-employed earnings
• Any salary/bonus sacrificed for pension contributions if:
  • The arrangement started on or after 9 July 2015. This could apply where a decision to renew the arrangement is required from the member
  • Contributions have increased since 9 July 2015 (this could be the whole amount or just the increase)*

You should then deduct:

• Any contributions made to a pension (do not include any contributions made by an employer)
• Certain reliefs your client may be entitled to such as those applying to charitable donations (these reliefs are outlined in Section 24 of the Income Tax Act 2007)
  *Some employers will have a different name for salary sacrifice and you should check if you are unsure.

This will give you the threshold income for the 2024/25 tax year. If it is £200,000 or less your client will not be affected by the taper and their annual allowance will not be reduced. However, if it is above £200,000, your client will be affected if the adjusted income is over £260,000.

Firstly, add up all the following:

• All your client’s taxable income (as per their threshold income)
• Any contributions their employer has made to a pension (including any made by salary sacrifice)
• Benefits built up in a final salary (defined benefit) pension scheme, excluding the cost of their contributions
• Any contributions made to a workplace pension scheme where the contributions were taken from full pay before tax was calculated (Net Pay)

Then deduct the following:

• Certain reliefs your client may be entitled to such as those applying to charitable donations (these reliefs are outlined in Section 24 of the Income Tax Act 2007)

This will give you your client's adjusted income for the 2024/25 tax year. If it is less than £260,000, the tapered annual allowance will not apply. If it is more than £260,000 (and their threshold income is above £200,000) the annual allowance will be affected. It will reduce by £1 for every £2 of adjusted income they receive over £260,000 (the minimum allowance is £10,000).

If your client exceeds their annual allowance you should first determine if carry forward will reduce or eliminate the excess. If even after carrying forward there is still an excess amount, they will face a tax charge. In other words, the excess contribution, less any available  carry forward amounts, will be added to their income and as a result will be subject to Income Tax at your client’s highest marginal rate.

The charge is normally declared and paid through the income tax self-assessment process (although it could be deducted directly from your client’s pension savings if certain conditions are met – this is known as ‘Scheme Pays’ and your client will have to make a formal request to their pension scheme provider if they want to apply for this).