Tapered Annual Allowance

Currently you can pay or save up to £60,000 each tax year (or 100% of your taxable earnings if this is less than £60,000) into a pension and get tax  relief. This is your Annual Allowance. This cap applies to all your pensions combined, not just pensions you have with us.  If your taxable income is more than £260,000 a year, your Annual Allowance starts to reduce. For every £2 that you earn between £260,000 and £360,000 your Annual Allowance reduces by £1.   

There are two tests to decide whether your taxable income is more than £260,000. Threshold income The first test measures your threshold income. To work this out you need to work out your net coming, and your pension savings for the tax year. Broadly, your net income for the tax year includes your taxable income, overtime, bonuses, rental income, investment returns (include interest) and any pension payments – including State pensions. rom this you can deduct anything you paid into a pension scheme that received ‘relief at source’ tax relief.

Any lump sum death benefits you receive from a registered pension scheme, and any employment income given up under salary sacrifice. If your threshold income is less than £200,000 your Annual Allowance stays at £60,000. If it exceeds £200,000 a second test comes into play. You need to check your ‘adjusted income’. Adjusted income Your adjusted income is broadly your threshold income, plus, how much you earn or save in your pensions each year, but less any lump sum death benefits. If this exceeds £260,000 your Annual Allowance starts to reduce. If your adjusted income is more than £360,000 you automatically have an Annual Allowance of £10,000.

If you do go over your Tapered Annual Allowance, you might have to pay tax on the amount you exceed it by. For example, if your Tapered Annual Allowance is £20,000 but you have saved £22,000 over the tax year, you will only have to pay tax on the £2,000 you exceed the cap by. The charge is added to your taxable income, and you pay tax at your rate of income tax. You can pay the charge by completing a self-assessment tax return and filling in the ‘Pension savings tax charges’ section. It is your responsibility to pay this. You can fill out a return at gov.uk/self-assessment-tax-returns.