Tapered Annual Allowance
Important information - Pension and tax rules can change and benefits depend on your circumstances. You can normally access the money in a pension from age 55 (rising to 57 in 2028). This information isn’t personal advice. If you’re not sure what’s right for you, we can put you in touch with one of our financial advisers.
What is the tapered annual allowance?
The standard annual allowance is £60,000 for most people, but some high earners can be subject to a tapered annual allowance.
You’re usually impacted if your threshold income and adjusted income are over certain amounts. If you're affected your maximum annual pension allowance will be tapered down to as little as £10,000 for some people.
When did the tapered annual allowance start?
The tapered annual allowance came into effect on 6 April 2016.
Will I be affected by the tapered annual allowance?
The tapered annual allowance impacts some additional rate taxpayers. You’ll be affected if your adjusted income is more than £260,000, and if your threshold income is more than £200,000 this tax year.
Rule changes from 6 April 2023 mean that fewer high earners will be impacted by the tapered annual allowance overall. And those who were already impacted, can now pay in more across all their pensions each tax year than previously.
You can normally access the money in your pension from age 55 (rising to 57 in 2028).
This video explains the 2023/24 Tapered Annual Allowance changes.
How does the tapered annual allowance work?
For every £2 of adjusted income over £260,000, your annual allowance this tax year will be reduced by £1. If your adjusted income is over £360,000, your annual allowance will be £10,000 and there will be no further reduction.
How to calculate your threshold income
Broadly, threshold income is your total taxable income plus any salary/bonus sacrificed for pension contributions, minus some reliefs and any personal pension contributions you make.
If your threshold income is £200,000 or less this tax year, you don’t need to calculate your adjusted income and your allowance won’t be reduced.
How to calculate your adjusted income
Your adjusted income is largely your total taxable income after any reliefs, plus any employer pension contributions.
If your adjusted income is more than £260,000 your annual allowance will be tapered.
Example
Diane's salary is £240,000. After contributing 10% (£24,000) to her company pension (via a 'Salary Sacrifice' arrangement which has been in place since 2014), her salary becomes £216,000. Her employer contributes a further 15% (£36,000) to her pension.
Diane also holds shares which pay her a dividend income of £10,000 a year.
Threshold income = £226,000
Salary after salary sacrifice + dividend income
Adjusted Income = £286,000
Salary after salary sacrifice + employer contribution (including those made via ‘Salary Sacrifice’) + dividend income
This means Diane’s annual allowance (usually £60,000) will be tapered to £47,000 because her adjusted income is more than £260,000 (for every £2 of adjusted income over £260,000, her allowance is reduced by £1).
What if I exceed the tapered annual allowance?
Any contributions above the tapered annual allowance will trigger a tax charge.
This is calculated by adding the amount you have exceeded the tapered annual allowance by to your taxable income for that year.
This charge is normally declared and paid through your income tax self-assessment. Sometimes you can opt for the charge to be deducted directly from your pension savings. This is known as scheme pays, and you need to request this directly with your pension provider.
Check if you can make use of the carry forward rule
The carry forward rule allows you to use any unused allowances from previous tax years. To use this rule, there are two main requirements:
- You were a member of a registered pension scheme in each year you wish to carry forward from, regardless of if you contributed (the State Pension doesn’t count).
- You have earnings of at least the total amount you’re contributing this tax year. Alternatively, your employer could contribute to your pension.
If you think you might be able to ‘carry forward’ unused allowances from previous tax years, you’ll also need to determine if you were subject to the tapered annual allowance in those tax years.
To help you work out if you were subject to the tapered allowance in the three previous tax years, you can find more information on page two of our carry forward and annual allowance factsheet.
Pension and tax rules change, and their benefits depend on individual circumstances.
Get advice on tax planning
If you want to ensure you're making the most of all the available tax allowances, we can help.
Our financial advisers can work with you to understand your situation, and arrange your savings and investments in the most tax efficient way to mitigate any unnecessary tax burdens.
Help and resources
Tax planning for high earners
If you’re a high earner, there are several ways you can reduce your tax bill. Our hub offers three tax saving tips.
Carry forward and annual allowance factsheet
To find out more about the tapered annual allowance and the carry forward rule, download this essential factsheet.
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