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We are already a good way through the 2016 tax year in which the tapered annual allowance legislation was implemented and there are still a lot of misconceptions as to its effects. The legislation is very complex and here Taylor Patterson try to demonstrate how it can impact upon those individuals classed as high earners.
If your income from ALL sources (this includes adding back in employer contributions and those pension contributions paid before tax) is over £150,000 then the amount of contribution on which you receive tax relief reduces on a £2 for £1 basis. Once your income from all sources is at £210,000 you are subject to the minimum contribution limit of £10,000.
Tapering is applied in each tax year. As such, an individual may have a tapered annual allowance in one tax year and a full annual allowance in the following tax year, dependent on their income.
The difficulty that individuals and their professional advisers face, is that part way through the tax year you may not know what your income from all sources will be. For example, you may not know what dividends are likely to be declared and paid, or you may not know how much income you will receive from your buy to let properties. To under contribute means you miss valuable tax breaks but to over contribute means you will suffer further tax charges.
Our advice is that if you are unsure of your income position you should contact your accountant as soon as possible. It should be noted that the carry forward of unused allowances from the three previous tax years is still available for those who wish to take advantage of this. Where this annual allowance is reduced by the taper, the carry forward will be the balance of the tapered amount.
We have provided the example below as a demonstration:-
An individual earns £80,000 p.a. and in addition puts a personal contribution of £40,000 into his pension.
2 months later his property manager notifies him that he has received £30,000 income from his buy to let properties.
He then receives £20,000 in dividends from his shares in the company he owns.
Total income excluding pension threshold income is £130,000 (£80,000+£30,000+£20,000)
His adjusted income is £170,000
The individual will therefore not receive the full 40% tax relief on £10,000 worth of the personal contribution. This is because the adjusted income has been tapered down by £2 for £1 basis over the £150,000.
For further detailed information on the tapered annual allowance for high earners and for definitions of threshold income and adjusted income, please refer to our technical guide.
If you feel that you may be impacted by the tapered annual allowance please speak to your accountant or financial adviser at the earliest opportunity, or for further information, please contact Kerry Houghton on 01772 550614 or via email firstname.lastname@example.org