Are you a high earner, with an income of more than £200,000 per year? Did you know this may mean you are not eligible for a full pension annual allowance? Instead, you may have a tapered annual allowance. This limits the amount of pension contributions you can make whilst benefiting from tax relief. In this article, we’ll discuss what a tapered pension allowance is, and how it is calculated. We’ll also look at other tax-efficient investment options that are available for high earners.
What is a tapered allowance?
To understand a tapered allowance, there is some terminology to understand.
An annual pension allowance is the maximum amount that can be saved into a pension per year, before tax is due. This is the lower of £60,000 or 100% of your relevant earnings for most people.
Threshold income is an individual’s total income less their pension contributions. The total income includes salary, any received bonuses, savings interest and dividends they have received.
Adjusted income is an individual’s total income, as described above, plus their employer’s contributions to their pension.
The standard pension annual allowance is £60,000. If you earn over £200,000, this is tapered to a minimum of £10,000, and is known as your tapered annual allowance.
You will receive a tapered annual allowance if both below statements are true:
1. Your threshold income is more than £200,000
2. Your adjusted income is more than £260,000
When calculating your tapered annual allowance, the standard allowance of £60,000 is reduced by £1 for every £2 of adjusted income that you receive over £260,000. The minimum tapered allowance is £10,000, for those with an adjusted income of more than £360,000.
Example
If your total income is £240,000 per year, and you pay £30,000 into your pension, your threshold income is £210,000.
If your employer also pays £30,000 into your pension, your adjusted income is £270,000.
This is £10,000 above the £260,000 threshold, so your annual allowance will reduce by £5,000. Your annual allowance will therefore be £55,000.
As £60,000 has been contributed to your pensions this year, income tax will be due on the £5,000 difference.
Why calculating your tapered annual allowance is important
If you are a high earner, and in receipt of a tapered annual allowance, it’s important to understand your new allowance. Without knowing this, you may find yourself with an unexpected tax bill.
You can calculate your tapered allowance on the government website.
What to do if you reach your tapered allowance
Should you have reached your tapered pension allowance, but still have funds available to invest, there are other options available.
You can invest up to £20,000 in ISAs, including both cash ISAs and Stocks and Shares ISAs, each financial year. A Stocks and Shares ISA differs from other investment products. Any investment growth or income generated from them is free from both income tax and Capital Gains tax*. As a form of investment, there is a risk involved with Stocks and Shares ISAs, however historically, these ISAs have outperformed cash savings in the long term. Here at Willday, we’ll help you manage your Stocks and Shares ISA investments to make sure your money is working hard for you. We’ll continue to monitor your portfolio of investments to ensure you receive the highest returns possible.
If you have direct dependents under the age of 18, you can also set up a Junior ISA for them. This tax-efficient investment will benefit them in their early adult life. They will gain control of where the money is invested from age 16, however they cannot access the funds until 18. This gives a great opportunity for the funds to grow. Up to £9,000 can be saved each year into a Junior ISA. This tax-free allowance is in addition to the £20,000 ISA allowance. As with an adult ISA, growth from a Junior ISA is free from income tax and Capital Gains tax*.
How the Willday team can help you
Willday Wealth Management’s team of experts can help you calculate your tapered annual allowance. This will help you to avoid paying unnecessary income tax, by ensuring your pension contributions do not exceed it.
We can also discuss tax-efficient ways you can invest, once your tapered pension allowance has been exhausted. We’ll discuss your circumstances and investment goals, and find the most suitable options for you. Call us on 0116 222 0119 or email hi@willdaywm.co.uk to start the conversation.
* With investing, your capital is at risk and you may get less than what you invested. Tax treatment depends on your individual circumstances and may change in the future.
