2023/24 Pension allowance tapering – what does it mean?
What is Pension Allowance Tapering?
Introduced in 2016, Pension Allowance Tapering reduces the annual maximum contribution that can be paid into an individual’s pension pot in any one year for ‘high earning’ individuals. Any pension contributions over this maximum are subjected to a tax charge at the individuals effective tax rate. This ultimately means that those impacted individuals could face significant tax bills as a direct result of the pension contributions that they have made during the tax year in question.
Key Facts
The current annual gross maximum contribution limit in the UK is now £60,000 per annum for the 2023/24 tax year (£40,000 in 2022/23), any contributions in excess of this value will be charged tax on the difference
However, this maximum contribution limit is reduced for individuals who have both an ‘adjusted income’ over £260,000 (£240,000 in 2022/23), and a ‘threshold income’ over £220,000 during the 2023/24 tax year (£200,000 in 2022/23)
The maximum contribution is reduced by £1 for every £2 of adjusted income over £260,000 the individual earns
For those individuals who reach both the adjusted and threshold income, the revised annual contribution limit stands now at a maximum of just £10,000 (£4,000 in 2022/23)
The maximum contribution is the combined total of employee and employer contributions, as well as any gross other private/non employment contributions made
Some relief might be able to be obtained where an individual has unused annual allowance brought forward, and so it is important that you discuss this with a financial advisor
What is Adjusted and Threshold Income?
A key component of the Tapering Allowance is the distinction between these two defined incomes, and so it is vital that they are reviewed and totalled in order to ascertain if one is caught by the restriction.
The rule of thumb is for the individual to calculate their Threshold Income and if this exceeds £220,000, then go on to further calculate their Adjusted Income to ascertain whether the annual allowance should be tapered.
Definitions in their most simplistic form are shown below, however we recommend you seek guidance/review the HMRC website when calculating these values;
THRESHOLD INCOME
Threshold Income is essentially total income in the tax year (e.g. from employment, dividends, rental profits and investments etc.) adjusted:
less (i.e. minus) the amount of any taxable lump sum pension death benefits paid to the individual during the tax year that can be deducted from the threshold income
less gross pension contributions made by the individual whereby relief was given at source
to include (i.e. add) any reduction of employment income for pension provision through salary sacrifice arrangements or other flexible remuneration arrangements
ADJUSTED INCOME
Adjusted Income is essentially total income in the tax year (e.g. from employment, dividends, rental profits and investments etc.) adjusted:
to include (i.e. add) amounts of claims made for tax relief on pension savings where they were paid before tax relief was given
to include pension savings made to your scheme where tax relief was given
to include the amount of pension savings your employer made for you
less (i.e. minus) any taxed lump sums or death benefits received
As you can seen above, the above calculations can become complex and involve identifying and totalling an array of different values, and this is simply to ascertain whether the tapering applies to you or not!
What action should you take now?
Review your threshold and adjusted income levels to establish whether you will be caught by the above restriction- if you are unsure, you should speak to a financial advisor
Where you are caught, calculate your revised tapered down annual allowance that is applicable to you. For every £2 of adjusted income you have over £260,000, reduce your annual allowance by £1 accordingly. Remember, everyone is entitled to at least the £10,000 annual allowance and so only reduce your allowance down to £10,000 as a minimum
Where you are caught, consider (though again, seek financial advice on this) immediately limiting your personal contributions such that your total contribution in the tax year that you are in will not exceed your revised allowance
Speak to your employer to discuss the fact that being a pension scheme member may no longer be tax efficient for you. You may be able to plan together how best you both can save for your pension, and where appropriate you may be able to negotiate an increase in salary to compensate for a reduction in contributions
Where you think you may be subject to a reduced allowance and have excess contributions for the tax year just ended, you should contact your accountant as soon as possible so that the potential tax charge can be calculated to avoid any nasty future surprises
This is not a simple topic to cover and so we would strongly recommend that you consult both your accountant and financial advisor to discuss this in more detail and to establish whether or not you are impacted by the tapering allowance. The key to operating in the most tax efficient manner possible is preparation and planning; leaving your financial affairs to the last moment will lead to both a much higher chance of unexpected surprises as well as paying more tax than was necessary. If you are in any doubt at all, feel free to contact the team and we’d be happy to chat with you.