2) £10,000 reduced due to high earnings and tapered annual allowance.
Barry can still make a £129,500 single contribution instead of the restricted £10,000 using carry forward. Using the carry forward facility before the end of the 2016/17 tax year means an additional £10,000 of unused allowance is available from the 2013/14 tax year.
2) Avoiding the Tapered Annual Allowance (TAA)
Exceeding the £150,000 adjusted income limit will trigger the tapered annual allowance but this can be avoided.
Threshold income is £110,000. If an individual’s threshold income is less than £110,000 then there is no requirement to check the individual’s adjusted income.
Keeping threshold income below the limit by making personal pension contributions could be beneficial in avoiding the tapered annual allowance – thus making more annual allowance available.
So what is threshold income? Threshold income is taxable income but excludes adding in pension contributions, except those that result from a new salary sacrifice agreement entered into on or after 9 July 2015.
So for those who need to retain the full annual allowance and who may be close to the threshold limit it may be beneficial to reduce taxable income by way of making a personal pension contribution.
Example
Jack has a salary of £100,000, a bonus of £20,000, rental income of £20,000 and his employer pays in £20,000 to his occupational money purchase scheme.
If Jack takes no action his threshold income would be £140,000 (his employer contributions do not count in this calculation) so £30,000 above the £110,000 limit.
This means he would be subject to the “Adjusted Income” calculation (where employer contributions are taken into account) and so his adjusted income becomes £160,000 and therefore subject to the TAA. This means Jack will lose £5,000 of his annual allowance.
However, Jack could reduce his threshold income. If Jack pays a personal contribution of £31,000 it can be deducted from his total taxable income. This will keep his threshold income below £110,000 with no requirement to calculate adjusted income and so he will not be subject to the TAA.
Jack effectively retains all his annual allowance. In practical terms however, the circumstances in which making pension contributions to reduce threshold income may prove quite narrow.
Money Purchase Annual Allowance
Reduction to the money purchase annual allowance (MPAA) from the current £10,000 to £4,000.
