In practical terms however, the circumstances in which making pension contributions to reduce threshold income may prove quite narrow.
Yes and no. The total would be £170,000, but as mentioned earlier, personally contributing this amount, would mean the individual is a high earner as far as the tapered annual allowance rules are concerned and £20,000 over the £150,000 limit.
This would result in the available allowance for the current tax year reduced by £10,000 (annual allowance reduced by £1 for every £2 over the limit).
Up to £30,000 of allowance can be lost as a result of the new tapered annual allowance rules. So for high earners restricted by this rule, using the carry forward facility could be very useful. If the contributions were to be made by the client’s employer rather than personally then the link to relevant earnings can be ignored.
Example
Barry is self-employed and has relevant earnings of £200,000 but once his adjusted income is calculated and investment income included it totals £230,000.
As a result, his current year’s annual allowance is reduced by £10,000. His earnings during previous tax years were much lower so his past contributions reflected this position.
Barry wants to maximise contributions to reduce his tax bill.
Tax year | Annual Allowance (AA) | Pension Input | Unused allowance available | Carry forward of unused allowance |
2013/14 | £50,000 | £3,000 (regular) | £47,000 | £47,000 |
2014/15 | £40,000 | £3,000 (regular) | £37,000 | £84,000 |
2015/16 Pre-alignment period (up to 8 July)* | £80,000 | Regular premium £1500 | (£78,500) but only a maximum of £40,000 can be carried over from the pre- alignment period |
2015/16 Post-alignment (after 8 July) | £1,500 | £38,500 | £122,500 |
2016/17 | £10,000** | £3,000 (regular) | £7,000 | £129,500 |
1) Tax year 2015/16 was split into two periods – pre- and post-alignment periods either side of the 8 July. The AA for the pre-alignment period was £80,000 and nil for the post. However, the lower of £40,000 or remaining unused allowance from the pre-alignment period could be carried forward to the post alignment period. The above table assumes £40,000 was carried forward. In terms of carry forward a maximum of £40,000 of unused allowance can be used for tax year 2015/16.
2) £10,000 reduced due to high earnings and tapered annual allowance.
Barry can still make a £129,500 single contribution instead of the restricted £10,000 using carry forward. Using the carry forward facility before the end of the 2016/17 tax year means an additional £10,000 of unused allowance is available from the 2013/14 tax year.
2) Avoiding the Tapered Annual Allowance (TAA)
Exceeding the £150,000 adjusted income limit will trigger the tapered annual allowance but this can be avoided.
Threshold income is £110,000. If an individual’s threshold income is less than £110,000 then there is no requirement to check the individual’s adjusted income.
Keeping threshold income below the limit by making personal pension contributions could be beneficial in avoiding the tapered annual allowance – thus making more annual allowance available.
So what is threshold income? Threshold income is taxable income but excludes adding in pension contributions, except those that result from a new salary sacrifice agreement entered into on or after 9 July 2015.