Tapered Annual Allowance Explained
A reduction in the pension annual allowance for high earners. For every £2 of adjusted income above £260,000, the allowance drops by £1, to a minimum of £10,000.
What is Tapered Annual Allowance?
The tapered annual allowance reduces the standard £60,000 pension annual allowance for individuals with high incomes. It applies when your "threshold income" exceeds £200,000 AND your "adjusted income" exceeds £260,000. The taper reduces the allowance by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000.
How it works
Threshold income is your net income before pension contributions. Adjusted income adds back employer pension contributions. If both conditions are met, the taper kicks in. For example, at adjusted income of £300,000, your allowance is £40,000 (£60,000 minus £20,000, being half of £40,000 above the £260,000 threshold). At £360,000 or above, the allowance hits the floor of £10,000.
Real example
Dr Khan is an NHS consultant with a salary of £120,000 and employer pension contributions of £160,000 (defined benefit scheme growth). Her adjusted income is £280,000. The taper reduces her annual allowance by £10,000 (half of £20,000 above £260,000), giving her an allowance of £50,000. Because her employer contributions exceed this, she faces an Annual Allowance Charge on the excess.
Who does this affect?
Around 40,000 individuals in the UK are affected by the taper, primarily senior NHS consultants, partners in law and accounting firms, senior executives and City professionals. Many NHS consultants have reduced their hours or retired early because of the interaction between large defined benefit pension growth and the taper.
HMRC source
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