Do you have a reduced allowance for pension contribution purposes?

Do you have a reduced allowance for pension contribution purposes?

Pension planning is important to secure your future, but you may not know that there’s a maximum amount that can be contributed to an individual’s pension pot in a given year. It includes personal pension contributions, employee/employer contributions to a workplace scheme, and any other third party contributions paid on their behalf.  

There are lots of things to consider when working out your allowance, including unused allowances from earlier years, tapering of allowances, threshold income, and adjusted income. 

To make the most of your pension contribution allowance you need to understand the rules for pension planning purposes. For the current 2022/23 tax year, the annual allowance is £40,000. If an individual’s total contributions exceed this, a liability, known as the annual allowance charge, arises.

How much is the charge?

The amount subject to the charge will be taxable as the top slice of your income at the rates of 20%, 40% and 45%, respectively. If the charge takes you into an additional rate tax bracket, any of the charge falling within the higher rate band would be taxed at 40%, with the remainder at 45%.

Unused allowances from earlier years

The good news is that providing you were a member of a registered scheme (private or employer) in the three previous tax years, unused allowances from those years (2018/19, 2019/20 and 2020/21) are available to set off against any surplus in the current year 2021/22. Any unused allowances are used in order of the earliest year first after the current year’s allowances are used up. 

Tapering of annual allowance

Tapering was first introduced in April 2016 and updated in April 2020 (tax year 2020/21) to increase the income trigger thresholds. Its purpose is to reduce the pension allowance for individuals with high incomes. Broadly, where an individual has threshold income over £200,000 and adjusted income over £240,000, they need to consider whether or not they will be exposed to tapering; let’s explore this in more detail.

Threshold income

Threshold income, largely, is your total net taxable income in the year with a few adjustments; mainly adding back salary sacrifice for pension provisions (as these are deducted directly from your gross pay), deducting gross private pension contributions (outside of your employer’s scheme) and losses realised in year, and brought forward. This list is not exhaustive, there are other factors and sources to consider. A basic computation would be:

Net income (after employee contributions made under net pay arrangements)

Less: Personal pension contributions (grossed up)

Add: Salary sacrifice for pension provisions (post July 2015)

Total: Threshold income  

Adjusted income

The starting point is net income, before adjustments (as noted above). You then add any employer pension contributions, or pension growth from defined benefit scheme e.g. NHS pension scheme, to arrive at your adjusted income.

As you’ll appreciate, the rules regarding pension relief can be complex, and there are many variables. To help we have created an example working information sheet for you to reference. Our team of experts are on hand to discuss this in more detail, if you feel you may be affected. Please get in touch with your main contact at Larking Gowen in the first instance or email enquiry@larking-gowen.co.uk and we will put you in touch with someone who can help.

How we can help

Planning and calculating your pension can be very complicated, we have produced an example calculation here for information.  We would also advise our clients to seek advice from an independent financial advisor.

If you have any questions please contact your usual Larking Gowen contact if this is something you would like to discuss further. You can find contact details in the Our People section of our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.