Tapered Annual Allowance

From April 2016 the rules around pension contributions have significantly changed which may have a considerable effect on people with higher incomes.
Previously everyone was entitled to contribute £40,000 into their pension pot, tax-free every year. However from April 2016 the government have introduced the ‘Tapered Annual Allowance’.  You will be subject to this Tapered Annual Allowance if you meet both of the following points:
-   Threshold income is over £110,000 – This is total income excluding any pension contributions 
-   Adjusted income is over £150,000 –  This is total income including any pension contributions 
Therefore if your threshold income is less than £110,000 then you will immediately qualify for the full £40,000 annual allowance, assuming no retirement benefits have been accessed flexibly.
However as stated above if both points are met then the tapered annual allowance will apply.  The annual allowance of £40,000 will start to be reduced by £1 for every £2 your income is over £150,000.  The maximum reduction is £30,000 and therefore the minimum annual allowance will be £10,000. 
This means the minimum annual allowance will be relevant to people with income in excess of £210,000. 
Any contributions above your annual allowance will be taxed at your marginal rate of tax.  Therefore if your income is over £150,000 the excess pension contributions will be subject to an annual allowance charge of 45%, assuming no carry forward of unused annual allowances from previous tax years is available.  
If you would like any further information or advice regarding this matter please contact Jake Egner or one of the tax team at Scrutton Bland on 01206 838400 or 01473 267000.