View more on these topics

Mike Morrison: Tackling annual allowance tapering calculations


Financial adviser David was looking at some of his higher earning clients to ascertain the effect of the annual allowance taper due to start on 6 April. In some ways this sort of work annoyed him – complexity for the sake of it from the last Budget. And there is still a chance the forthcoming Budget will change things yet again.

The task that faced him was to work out the adjusted income and the threshold income for each client before deciphering any taper and any new annual allowance. He had devised a method of working through this.
First, figure out the client’s adjusted income. This is total gross income from all sources, so includes investment income as well as salary. Now add all pension contributions including any deductions under net pay arrangements. Then deduct personal contributions and any lump sum death benefit where the recipient is liable to tax.

If the total is £150,000 or less then the tapered annual allowance will not apply. If the total is more than £150,000 then a check against the client’s threshold income is also required. Note that sacrificing salary or bonus payments for employer contributions purely to reduce the client’s adjusted income for this purpose will be ineffective.

If the client’s net income (total income less personal contributions entitled to relief at source) is less than the £110,000 threshold, then they will not normally be subject to the tapered annual allowance. Any new salary sacrifice arrangements set up on or after 9 July 2015 will need to be included.

So the calculation would be: Total gross income from all sources including investment income + any new salary sacrifice/flexible earnings set up on or after 9 July 2015 – personal contributions entitled to relief at source = net income.

Case study

Julian runs his own PR agency and for the current year (2016) has taxable income, made up of salary and dividends, of £115,000.

Julian is keen to retire as early as he can and he maximised his pension contributions in 2013/14 and 2014/15.

In 2015 he had not made a contribution due to a business expansion opportunity. In 2016/17 he wants to maximise his contribution from the business, making use of his carry forward from 2015/16.

David looked at the figures:

Scenario 1

If the employer contributes the maximum available contribution of £80,000 his situation is:

Adjusted income £195,000 (£115,000 income chargeable to income tax + £80,000 total pension input).

Threshold income £115,000 (£115,000 income chargeable to income tax).

As both the adjusted and threshold income are above the relevant thresholds, Julian would be subject to the taper. The £45,000 excess adjusted income reduces Julian’s 2016/17 annual allowance by £22,500 to £17,500.

The excess of £22,500 would be subject to the annual allowance charge.

David had a bit of a think. Is there any advantage to be gained by splitting the contribution between employer and employee? He realised that salary sacrifice and/or flexible salary arrangements would not avoid the taper but a small business might have scope to amend the source of the contribution, which might assist. He re-did the numbers.

Scenario 2

Julian could make a personal contribution of £5,000, and his company make an employer contribution of £75,000. In this scenario the situation would be as follows:

Adjusted income £190,000 (£115,000 income chargeable to income tax + £80,000 total pension input – £5,000 personal contribution).

Threshold income would be £110,000 (£115,000 income chargeable to income tax – £5,000 personal contribution).

As the threshold income no longer exceeds £110,000, Julian’s annual allowance would not be tapered, so no annual allowance charge would apply.

So with just a slight tweak to the numbers, David is able to help Julian avoid the taper, allowing him to maximise his pension contributions and to catch up on the year that he missed out on.

Mike Morrison is head of platform technical at AJ Bell



Osborne abandons pension tax relief reform

Chancellor George Osborne has reportedly axed plans to overhaul pension tax relief as part of the upcoming Budget. Osborne had promised to examine a potential overhaul of the system as part of his July 2015 Budget, with options including a move to a flat-rate system, or a more dramatic overhaul to convert the system and […]


Barings to merge with three boutique managers

MassMutual has merged four of its underlying boutique asset managers, including Barings Asset Management, creating a firm with $260bn in assets. Barings will be merged with fixed interest specialist Babson Capital Management, property specialist Cornerstone Real Estate Advisers and alternatives and private equity manager Wood Creek Capital Management.The four boutique managers are all owned by Massachusetts […]


M&G sees £32bn gross outflows as investors ditch fixed income

M&G has been hit by £32bn of gross outflows last year, leading to £10.9bn of net outflows as retail investors moved away from the asset manager’s bond funds. In its full year results for 2015, released today, the asset management arm of Prudential said it saw net retail outflows of £10.9bn “due to redemptions from […]

When to use a loan trust for inheritance tax planning

Gerry Brown, technical manager at Prudential, considers when is the correct time to use a loan trust for inheritance tax planning Pierre, age 61, has recently retired from his role as conductor of the Ambridge Symphony Orchestra. He has a portfolio of Oeics, yielding about £3,000 annually, and is accordingly looking forward to the introduction […]

Sierra Leone cover image - thumbnail

White paper — Sierra Leone International Insights

Jelf Employee Benefits assesses the areas that employers should be aware of when considering operating in Sierra Leone, including healthcare access, delivery and insurance provisions. This report draws on various sources to highlight specific considerations for this emerging jewel in West Africa.


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm