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What is the tapered annual allowance and how could it affect you?

Posted on: 23rd Apr 2018 by: CamOuse Financial Management Limited

One of the key advantages of saving for your retirement through a pension scheme is the tax relief you receive on the money you contribute, usually available at your usual rate of tax. The ‘Annual Allowance’ limits the amount of contributions both you and your employer can make to your pension in a year which benefit from tax relief, and is currently set at £40,000.

However, in April 2016, the government also introduced the ‘Tapered Annual Allowance’, which reduced the annual limit for those whose total income exceeds £150,000. This amount includes your salary, bonuses, dividends, savings interest and employer pension contributions. For every £2 of income above £150,000, your Annual Allowance will be reduced by £1, up to a maximum reduction of £30,000. So that those who receive a one-off increase in pension contributions from their employer are not unfairly caught out, the government also ensured that the Tapered Annual Allowance only applies to those whose taxable income before employer pension contributions is above £110,000.

Looking at some examples shows how the Tapered Annual Allowance works. Andy receives a salary of £160,000 in the 2017/18 tax year, with a further £16,000 of pension contributions from his employer. This gives a total income of £176,000, which is £26,000 over the £150,000 limit. Andy’s Annual Allowance is therefore reduced by £13,000 (half of that amount), meaning the amount of his pension contributions which can benefit from tax relief during 2017/18 is lowered from £40,000 to £27,000.

Bethany, meanwhile, earns a salary of £195,000 in the same year, with her employer making £15,000 of pension contributions. Her income from rental properties, savings and a share portfolio amounts to £20,000, giving Bethany a total income of £230,000, exceeding the £150,000 limit by £80,000. As half of this amount is £40,000, Bethany will receive the maximum reduction of £30,000. She will therefore only receive tax relief on up to £10,000 of her pension contributions in 2017/18.

If the Tapered Annual Allowance affects you and you’re wondering whether there are any legal workarounds which can be implemented to avoid being hit by it, the short answer is that there aren’t. Of course, if your total income decreases then your Annual Allowance will increase again. But apart from either earning less or reducing the amount you and your employer contribute to your pension (neither of which is a good idea), as long as your total income is over £150,000 you will be subject to the current rules.

Tags: Savings, Investments, Retirement,


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CamOuse Financial Management is authorised and regulated by the Financial Conduct Authority.

None of the information contained in this website should be considered as personal recommendation and is for information only. Should you wish to make a financial transaction we recommend that you take personal financial advice after a thorough review of your personal and financial circumstances.

The information contained within the website is subject to the UK regulatory regime and is therefore primarily targets at customers in the UK.

Registered address: Unit 111, Lancaster Way Business Park, Ely, Cambridgeshire, CB6 3NX

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Understanding the true cost to your business

Pension arrangements must be available for all employees. There are three categories of employee:

Eligible

Aged between 22 and State Pension Age (SPA) with qualifying earnings over the Auto Enrolment earnings trigger

Non-eligible

Aged between 16 – 74 with qualifying earnings between lower threshold and the Auto Enrolment earnings trigger
 
Aged between 16 -21 or SPA – 74 with qualifying earnings over Auto Enrolment earnings threshold

Entitled

Aged between 16 -74 with earnings below the qualifying earnings lower threshold

Important Notes

  1. Eligible jobholders must be auto-enrolled
  2. Non-eligible jobholders are allowed to be auto-enrolled if they want to
  3. Entitled workers are entitled to join a pension scheme, but the employer doesn't have to contribute

Qualifying Earnings lower threshold

£5,772

Qualifying Earnings upper threshold

£41,865

Automatic Enrolment earnings trigger

£10,000

Minimum contribution level options:

8% of Qualifying Earnings of which

3% is employer's (starting at 1%)

9% of Basic Salary of which

4% is employer's (starting at 2%)

8% of Basic Salary of which

3% is employer's (starting at 1%)

(Where basic salary is at least 85% of total earnings)

7% of gross earnings of which

3% is employer's (starting at 1%)

Pay reference period

Essentially the frequency that the jobholder is paid e.g. monthly, weekly etc. but with reference to the tax month, week etc. therefore it may not be the same as the payroll period.

Deduction and payment of contributions

It is the employer who is responsible to calculate, deduct and pay all contributions to the AE scheme. NOTE – the first and last contributions are likely to be for less than a full pay reference period and should be adjusted accordingly.

Payroll services

It can be seen that it is very important that the payroll system synchronises with the AE scheme otherwise the employer will not be carrying out all requirements and then penalties will be incurred.

Staging date

Based on the employer’s payroll size as at 1 April 2012 and can be found at www.thepensionsregulator.gov.uk/employers using your PAYE reference. The Qualifying Workplace Pension Scheme must be registered with The Pensions Regulator within 4 months of the staging date.

Compliance and communication

Postponement

Auto-Enrolment can be postponed for up to 3 months:

  • For current eligible employees
  • For workers that meet the criteria in the future for the first time e.g. avoid joining temporary or lower paid workers

Opt-Outs

All eligible employees must be auto-enrolled, but can, with the correct notification, opt-out within one month of joining the scheme and be treated as never having joined. They can opt back in and will automatically be auto-enrolled every 3 years in any case!

Communication

There is a wide range of information that must be provided to all employees at certain times, such as:

  • The date auto-enrolment took place for eligible jobholders
  • That non-eligible jobholders have the statutory right to opt in
  • Entitled workers have the right to request the employer to enrol them into a pension scheme

Salary sacrifice

Contributions can be paid by effectively reducing salary, which saves on NI contributions, but employee must choose to do this – they cannot be forced, so a contractual variation will need to be implemented.

Default investment fund

Investment Options

All eligible employees will be automatically invested into a default investment fund, which is a balanced risk fund that is “life styled” to account for the employees approach to retirement. They also have the option to invest in a wide range of funds of their choosing.