Tapered Annual Allowance

by Alexander Beard, on Jan 9, 2017 9:53:36 AM

What is the tapered annual allowance?

The tapered annual allowance has been designed to reduce the annual allowance for individuals with adjusted incomes over £150,000.  This will reduce the annual allowance by £1 for every £2 of income above £150,000.  The maximum reduction is £30,000 where individuals with incomes of £210,000 or over, will have their annual allowance reduced down to £10,000.

There are two income limits used to measure whether the tapered annual allowance will apply to an individual or not.  The first is the threshold income limit, which is set at £110,000.  If an individual’s income is above this amount then they will have their adjusted income tested and where this exceeds £150,000 the tapered annual allowance will apply.

It will be important to understand which types of income are considered when looking at the threshold income and adjusted income.

Money Purchase Annual Allowance (MPAA)

Where an individual is subject to both the tapered annual allowance and the money purchase annual allowance, their allowance can be determined as follows:

  • The tapered annual allowance will be their actual annual allowance, although the MPAA will still apply to the level of contributions that can be made to a defined contribution scheme.
  • To determine how much applies to the MPAA and how much to the alternative annual allowance
  • First deduct the MPAA from the available tapered annual allowance
  • Whatever remains is the available alternative annual allowance, if nothing remains then the alternative annual allowance is nil

For example, if an individual’s tapered annual allowance is £15,000, you would deduct the MPAA of £10,000 from £15,000, leaving £5,000 available as the alternative annual allowance.

Tapered Annual Allowance and Carry Forward

Individuals will still be able to carry forward unused allowance from the previous three tax years providing:

  • They have unused annual allowance available for those tax years
  • They were a member of a pension scheme over those tax years
  • If they are making the contribution, they have relevant UK earnings in this tax year to cover the size of any contribution being propose

John Croasdale
Senior Partner - Chester branch

Topics:Annual AllowanceTaxUK