Most high net-worth individuals saw their annual allowance towards their pension pots restricted by tapering rules, which came into effect from 6 April 2016.
The annual amount you can save towards your pension in 2018/19 is £40,000, although this allowance is tapered for higher earners.
Westminster introduced the tapered annual allowance for those with threshold income of more than £110,000 and adjusted income of more than £150,000.
If you fall into this bracket as a high net-worth individual, and your threshold income is more than £110,000, adjusted income must be calculated to work out your tapered annual allowance.
Adjusted income accounts for all employer contributions towards your pension, so if your adjusted income is more than £150,000 it will be reduced by £1 for every £2 over this threshold.
Several of our clients are contractors, such as doctors, dentists, opticians and pharmacists, who have been affected by this in recent years – but what issues are they facing?
Annual adjusted income of more than £210,000
Imagine a physician called Hannah. She is an additional-rate taxpayer, who was on a 12-month contract at Glasgow Royal Infirmary for the entire 2016/17 financial year.
Her threshold income in that time was £200,000 and her employer put £10,000 towards her pension to take her adjusted income to £210,000 in 2016/17.
As such, her annual allowance was tapered by £1 for every £2 over her adjusted income threshold of £150,000 so the maximum she could save towards her pension in 2016/17 was £10,000.
If your adjusted income is more than £150,000 in 2018/19, get in touch with our experts to find out how much you can save towards your pension this year.
However, if your income exceeds £210,000 a year, your annual allowance cannot be tapered to less than £10,000.
Carrying forward any unused annual allowance
It’s still possible for you to carry forward any unused annual allowance from the previous three years and apply it to 2018/19 where the taper applies.
This means if you have not paid into a pension in the last three tax years, you can pay up to £160,000 into your pension this year without being taxed.
This is because you can carry forward three years of your full £40,000 annual allowance, and add this to your £40,000 entitlement in 2018/19 (4 x £40,000 = £160,000).
How can we help?
There’s much more to the tapered annual allowance than this blog outlines, and our team is on hand to offer potential solutions to solve any issues you may be encountering.