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As the end of the tax year approaches we thought we would remind you of the rules surrounding tapered annual allowance, the legislation which reduces the tax relief on pension contributions for high earners.
Individuals who have income for a tax year of greater than £150,000, will have their annual allowance for that tax year restricted. For every £2 of income that exceeds £150,000, £1 of the annual allowance is lost. There will be a cap on the reduction (or tapering) of £30,000, so that anyone with adjusted income of or above £210,000 will have a minimum annual allowance 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.
It will still be possible to carry forward any unused annual allowance from the three previous tax years and add it to the individual’s annual allowance. Where this annual allowance is reduced by the taper, the carry forward will be the balance of the tapered amount.
One of the major complexities of the new system is that a member’s annual allowance for any given tax year will depend on their adjusted income for that tax year. Individuals who may have separate self-employed earnings or receive significant bonuses or commissions may not know at the start of the year whether or not they are affected until the end of the tax year.
This means that Taylor Patterson cannot confirm what their annual allowance is, and we would recommend liaising with their financial adviser and/or accountant to help assist them.
As we get into the final few weeks of the tax year if your clients are looking contribute it is worth remembering that an individual can make a pension contribution to take them under a Threshold Income of £110,000 thus retaining the full annual allowance. Similarly a director of a limited company can make a pension contribution instead of taking dividends to achieve a similar result.
Further details can be found here.