The annual allowance chargeAegon Content Team 7 October 2016 Back to results
*For adviser use only
On 6 April 2016 a reduced annual allowance for high earners was introduced in the form of the tapered annual allowance.
The tapered annual allowance brings yet another layer of complexity onto the annual allowance rules. There are now rules for the normal annual allowance, the money purchase annual allowance, the tapered annual allowance and carry forward. Tapering could affect some of your clients – take a look at this article to find out more about the new rules.
Why was the tapered annual allowance introduced?
- To pay for reforms to inheritance tax rules that were announced in the Summer Budget of 2015.
- To control the amount that giving tax relief on pensions costs the government. In the short term, the government wants to make sure that support to pension savers is affordable and targeted where it’s needed most.
How does tapering work?
There’s now a reduced annual allowance, effective from 6 April 2016, for those with an ‘adjusted income’ of over £150,000. The reduction works through the operation of a £1 reduction in the annual allowance for every £2 of adjusted income above £150,000, with a maximum reduction of £30,000. So, those with an adjusted income of £210,000 or more in a tax year will have a £10,000 annual allowance for that tax year.
However, if an individual’s ‘threshold income’ is less than £110,000, the tapered annual allowance won’t usually apply.
Adjusted and threshold income are explained in more detail in our technical article.
The annual allowance charge
It’s worth remembering that people should still claim higher and additional rate tax relief on any pension contributions they pay that are within their relevant UK earnings.
If the tapered annual allowance amount is exceeded, then any annual allowance charge that occurs, will effectively claw back some of that tax relief. It’s also worth remembering that the annual allowance charge is always payable by the individual, even if the excess savings were down to employer contributions.
Six months on
Nearly six months on from the introduction of tapering for high earners we’re hearing that the new rules are causing difficulties for some people – such as the self-employed, employees with fluctuating earnings, those who receive large bonuses or those with defined benefit savings. Those groups need help to find out:
- if the new rules apply to them, or not;
- if they’ll affect benefit packages or salary levels;
- the general level of pension savings being made;
- the timing of bonus payments; and
- the amount of tax relief given by HMRC or the amount of tax that is paid to them for annual allowance charges.
If you’d like to find out more about the new rules take a look at our technical article; ‘What a caper over taper’ for an in-depth look at how taper works. The article details how to calculate adjusted and threshold income and includes tapering examples.