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Tapering the pensions annual allowance

 

Tapering the pensions annual allowance

On 6 April 2016, new measures were introduced that limit the benefits of the annual pensions allowance for additional rate taxpayers (individuals earning £150,000 a year or more).

The reduction of pension tax relief will negatively affect the tax positions of high earners, and may cause you to rethink your existing tax strategy.

What is the annual allowance?

The annual allowance on pension contributions is the amount you can pay into your defined contribution pension without being charged tax. The allowance is currently at £40,000 a year.

Any amount in excess of the allowance will receive a tax charge.

The annual allowance taper

Since 6 April 2016 additional rate taxpayers have seen their annual allowance restricted by the government’s new tapering mechanism.

It works by reducing the annual allowance by £1 for every £2 earned over the £150,000 additional rate band.

For example, if your annual taxable income is£170,000 (£20,000 over the additional rate band) your annual allowance will reduce by £10,000.

The taper will not eliminate the annual allowance for those earning more than £210,000 however. The annual allowance reduction will be limited to £30,000, meaning that individuals earning £210,000 and higher will still be entitled to a £10,000 annual allowance.

The taper will not apply until individuals’ threshold income (i.e. income excluding pension contributions) surpasses £110,000.

‘Carrying forward’ your allowance

One potential strategy for limiting the effects of the taper is to ‘carry forward’ previous years’ allowances. This option allows you to increase your allowance for the current tax year with any unused allowances from the past 3 tax years.

Your room for manoeuvre will depend on how much unused allowance you have to carry over (remembering that the allowance was £50,000 between 6 April 2011 and 5 April 2014).

Happy Christmas from Knight and Company

All of us here at Knight and Company wish you a very merry Christmas and a prosperous 2017.

As always, feel free to contact us if you have any questions or require any tax or compliance advice.

You can reach us by calling 01628 631 056 or emailing us at geoffk@knightandcompany.co.uk.