The tapered annual pension allowance has again hit the headlines, with reports suggesting that high-earning NHS staff are reducing their hours or leaving posts entirely to avoid the changes.
This is a worrying trend; in 2018 it was reported that five times as many people were leaving the NHS pension scheme than from other public pension funds.
What is the tapered annual allowance?
If you have a taxable adjusted income of more than £150,000, your annual allowance might be restricted by the scheme.
For every £2 you earn over the £150,000, your allowance will be reduced by £1, with a pre-tax taper set at £40,000.
The maximum reduction stands at £30,000. Therefore, if, for instance, you earn £210,000 a year, you’ll have an annual allowance of £10,000.
Exceed your annual allowance and you’ll be taxed, along with most other high earners who are in the same situation.
However, it’s not particularly easy to work out whether or not the taper applies to you, partially because it won’t apply if your threshold income sits below £110,000.
How do I know if it affects me?
To work out if your annual allowance should be tapered, you’ll need to calculate your adjusted income and threshold income.
- Adjusted income: includes all of your pension contributions (along with your employer contributions)
- Threshold income: this excludes all your pension contributions
To get started calculating the above, you’ll need your net income figure. Unfortunately, HMRC doesn’t make this particularly easy when it comes to tapering, because they view net income as all of your taxable income (i.e. it’s not just restricted to earnings).
This means you’ll need to deduct employee pension contributions, trade losses, under net-pay arrangements, charitable gifts and share loss relief, in order to arrive at your net income figure.
An example of how it might not apply
Sarah is a company director and shareholder with a taxable income of £110,000. Her company pays £50,000 into her pension on her behalf.
This makes Sarah’s adjusted income £160,000, thus triggering the tapered annual allowance. Her annual allowance would therefore normally be reduced by £5,000 to £35,000.
However, this isn’t the case for Sarah, because her threshold income is £110,000, which means her annual allowance will remain at £40,000.
Confused? You’re not alone. But we can help.
How has the government responded to criticism?
Chancellor Philip Hammond has already dismissed requests to scrap the tapered annual allowance, not least because of the £6 billion a year the Treasury hopes to raise from such pension reforms.
Hammond’s stance is that the scheme is justified because it only impacts the highest earning pension savers. Despite this, the tapered annual allowance will have a far bigger impact on those people during 2019/20.
The reason? If you earn consistently high wages, you won’t be able to carry forward significant amounts of your unused allowance like you could before.
They’re serious about this, too, with a number of anti-avoidance measures now in place. New legislation is designed to stop high net-worth earners entering into salary exchanges or flexible remuneration arrangements which reduce their adjusted or threshold income despite receiving additional pension contributions.
Need help? Don’t worry…
The tapered annual pension allowance is far from straightforward, and mistakes can be costly.
The Chancellor has also accepted that there is, “some evidence the annual allowance charge is having an impact on the retention of high-earning clinicians in the NHS”. They’ll subsequently be looking to address the issue, but it’s best not to expect a miracle if you’re in that line of work.
If you’re still scratching your head about whether or not it applies to you and what that means for your income, we’d recommend speaking to your accountant.
Alternatively, get in touch with our friendly team, who will be happy to have a chat.