Pension Contributions: Maximum now restricted by tapered annual allowance.
The annual allowance is the maximum value of pensions savings that you, your employer and other third parties can pay into your pensions each year without incurring a tax charge. The standard annual allowance for the 2016/17 tax year is £40,000. If you are a high-income individual for a tax year, your annual allowance will reduce by £1 for every £2 of adjusted income above £150,000 up to £210,000. If your adjusted income is over £210,000, your annual allowance will be £10,000.
In the 2016/17 tax year Jerry has a salary of £100,000 and receives £30,000 of dividends. He pays £15,000 gross of personal contributions to a SIPP. His employer also pays a contribution of £25,000.
His threshold income is:
Salary (£100k) + Dividends (£30k) – Personal Contributions (£15k) = Threshold Income (£115k)
His adjusted income is:
Salary (£100k) + Dividends (£30k) + Employer Contributions (£25k) = Adjusted Income (£155k)
Therefore Jerry is a high-income individual for the 2016/17 tax year.
The standard annual allowance is reduced by £1 for every £2 of adjusted income over £150,000: £155,000 (adjusted income) – £150,000 = £5,000 excess income £5,000 ÷ 2 = £2,500 reduction
£40,000 (standard annual allowance) – £2,500 = £37,500 tapered annual allowance.