Pensions for high earners
Published 27th March 2017
The tapered annual allowance came into force as 6 April 2016 for high earners. For every £2 of income above £150,000 per annum, £1 of annual allowance will be lost. The maximum reduction will be £30,000 meaning that anyone earning over £210,000 will have their annual allowance capped at £10,000.
An income floor will mean the taper will not apply unless the individual’s income excluding pension contributions exceeds £110,000 (referred to as their “threshold income”).
If you exceed the allowance
If you exceed the annual allowance in a year, you won’t receive tax relief -on any contributions you paid that exceed the limit and you will be faced with an annual allowance charge equal to the excess contributions.
The annual allowance charge will be added to the rest of your taxable income for the tax year in question, when determining your tax liability. Alternatively, if the annual allowance charge is more than £2,000, you can ask your pension scheme to pay the charge from your benefits. This means your pension scheme benefits would be reduced. Some pension providers will allow the transfer of the excess to future year(s).
Unless you have a money purchase annual allowance (MPAA), you may be able to bring forward any unused annual allowances from the previous three tax years, to either reduce your annual allowance charge to a lower amount or reduce the annual allowance charge completely.
For a money purchase pension the “contribution” is simply the gross premium paid. For defined benefit schemes the position is a lot more complicated and your pension provider or scheme administrator should be able to give you your pension input amount for that scheme. This refers to the amount of contributions or value of accrued benefits during the pension input period. If you think that you may be getting close to your annual allowance, or may have exceeded it, you may wish to consider taking advice from an independent financial adviser.
The HMRC manual for pension administrators explains the position as follows
If your member’s savings go above the annual allowance they may need to pay an annual allowance tax charge.
You’ll need to test your member’s pension savings against the annual allowance using the:
- actual amount of contributions for defined contribution arrangements
- increase in the value of benefit rights for other types of arrangements (such as defined benefits)
If your income is in excess of £150,000 and you or your employer are making substantial pension contributions you must check with your IFA to protect your position. It also helps to let us know too.