The new tax year brings additional complexities for those who are deemed by HM Revenue and Customs to be high earners.
Unfortunately, as with all things tax, working out if you are affected and by how much means a number of calculations. One thing is certain, the more sources of income clients have, the harder it will be to get to a definitive number when contributions need to be paid.
The actual tapering of the annual allowance is quite simple. The complex part is in relation to working out what income should be used for the calculations and knowing what someone’s income will be for the tax year, before the end of that tax year.
For someone with earnings of more than £150,000, their annual allowance will be reduced by £1 for every £2 they earn over this figure. So someone with earnings of £170,000 will have their annual allowance reduced by £10,000.
The reduction is capped so that it can’t reduce the annual allowance below £10,000, so for those earning more than £210,000, they will not see any additional reduction over the maximum of £30,000.
The way this is worded in the legislation is interesting because it takes account of future reductions to the standard annual allowance, with an emphasis on the £10,000 being a minimum, rather than the amount of the total reduction.
The complexity in all this is the income calculation; it isn’t just earnings from employment or self-employment, but calculated in a number of stages.
First, you need to know net income – total taxable income (chargeable to income tax) – which includes, for example, income from employment, interest on savings, dividend income, rental income from properties, reduced by deductions listed in section 24 of the Income Tax Act 2007, which are reliefs such as trading and share loss relief.
You will need to add back in reliefs claimed under net pay arrangements, excess claims also made in relation to net pay arrangements and personal contributions made under net pay arrangements (these shouldn’t already be included in the net pay figure).
If the individual is not UK domiciled and is paying contributions to overseas schemes and receiving tax relief, this will need to be added back in. The last addition is employer pension contributions, which, again, need to be looked at in more detail.
You can, however, deduct payments received from lump sum death benefits that will be subject to income tax by next year.
Employer contributions are simple if they are being paid to a money purchase scheme because they are simply the monetary amount.
However, if you are looking at a final salary scheme then it becomes more complicated because the total pension input amount needs to be calculated.