Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Pensions Tax Manual

From
HM Revenue & Customs
Updated
, see all updates

Annual allowance: tapered annual allowance

General
Income definitions
Anti-avoidance rule for tapered annual allowance
Money purchase annual allowance
Carrying forward unused annual allowance
Scheme Pays

Section 228ZA Finance Act 2004

General

From 6 April 2016, individuals with income for a tax year above £150,000 have their annual allowance for that tax year reduced on a tapered basis (a ‘reduced annual allowance’).

The annual allowance is reduced by £1 for every £2 of income above £150,000, subject to a minimum reduced annual allowance of £10,000.

Where the reduction would otherwise take an individual’s tapered annual allowance below £10,000 for the tax year, their reduced annual allowance for that year is set at £10,000.

Examples

Based on an annual allowance of £40,000 for the tax year.

  • An individual with income of £160,000 has a reduced annual allowance of £35,000 for the tax year.

(The £10,000 of income above £150,000 creates a reduction of £5,000 from the annual allowance of £40,000 - resulting in a reduced annual allowance for the tax year of £35,000.)

  • An individual with income of £215,000 has a reduced annual allowance of £10,000 for the tax year.

(The £65,000 of income above £150,000 creates a reduction of £32,500 which would otherwise have reduced the annual allowance to below £10,000 – in this case it would have been reduced to £7,500.)

If the reduction to be made from the annual allowance is not a multiple of £1, the reduction is rounded down to the nearest £1.

The income definition for the purpose of the tapered annual allowance is known as ‘adjusted income’.  This definition is based on the individual’s taxable income after allowing for certain reliefs plus the value of their pension savings during the tax year.

The tapered annual allowance restriction is subject to an income floor of £110,000 known as ‘threshold income’.  This definition is based on the individual’s taxable income after allowing for certain reliefs plus the value of certain pension-related salary sacrifice type arrangements.

An individual with threshold income of £110,000 or less for a tax year is not subject to the tapered annual allowance, regardless of the level of their adjusted income for that tax year.

Top of page

Income definitions

The tapered annual allowance applies to an individual for any tax year from 6 April 2016 onwards when:

  • the individual’s adjusted income for the tax year is more than £150,000, and
  • the individual’s threshold income for the same tax year is more than £110,000.

Adjusted income (over £150,000)

The definition of adjusted income is:

  • the individual’s net income for the tax year as calculated under steps 1 and 2 of section 23 of the Income Tax Act 2007, plus
  • the amount of any relief under section 193(4) of Finance Act 2004 (a claim for excess relief under net pay, see PTM044240) and section 194(1) of Finance Act 2004 (relief on making a claim) deducted at step 2, plus
  • the amount of any pension contributions made from any employment income of the individual for the tax year under net pay, under section 193(2) of Finance Act 2004 (see PTM044230), plus
  • where non domiciled individuals make contributions to overseas pension schemes, any relief claimed under Chapter 2 of Part 5 of the Income Tax (Earnings and Pensions) Act 2003 for the tax year, plus
  • the value of any employer contributions for the tax year, but less
  • the amount of any lump sum death benefit mentioned in section 636A(4ZA) Income Tax (Earnings and Pensions) Act 2003 that accrues to the individual in the tax year, see PTM073000.

 

In broad terms ‘net income’ is an individual’s taxable income left after deducting any reliefs due under section 24 of the Income Tax Act 2007.

An individual’s taxable income could include any of the following:

  • earnings from employment
  • earnings from self-employment/partnerships
  • most pensions income (State, occupational and personal pensions)
  • interest on most savings
  • income from shares (dividend income)
  • rental income
  • income received by an individual from a trust.

 

The value of the employer contributions for a tax year is found by taking the individual’s total pension input amount for the tax year less the total of any member contributions paid during the tax year.

The total pension input amount is calculated as usual.  See the following

PTM053200 for other money purchase arrangements,

PTM053300 onwards for defined benefits arrangements, and

PTM053400 for cash balance arrangements.

The total of any member contributions paid during a tax year means any contributions paid by the individual or any contributions paid by a third party on behalf of the individual (excluding any contributions paid in respect of the individual by the individual’s employer) to a:

  • registered pension scheme,
  • currently-relieved non-UK scheme, where the individual qualifies for relief in respect of the contributions due to being a currently-relieved member of that scheme (see PTM113310).

Threshold Income (over £110,000)

For this purpose the threshold income definition is:

  • the individual’s net income for the tax year as calculated under steps 1 and 2 of section 23 of the Income Tax Act 2007, less
  • the amount (before any deduction under section 192(1) Finance Act 2004) of any contribution paid in the year in respect of which the individual is entitled to be given relief under section 192 Finance Act 2004 (relief at source, see PTM044220),
  • the amount of any lump sum death benefits mentioned in section 636A(4ZA) Income Tax (Earnings and Pensions) Act 2003 accruing to the individual in the tax year, plus
  • the amount of any reduction of employment income for pension provision as a result of any ‘relevant salary sacrifice arrangement’, or ‘relevant flexible remuneration arrangement’, made on or after 9 July 2015.

 

In broad terms ‘net income’ is an individual’s taxable income left after deducting any reliefs due under section 24 of the Income Tax Act 2007.

An individual’s taxable income could include any of the following:

  • earnings from employment
  • earnings from self-employment/partnerships
  • most pensions income (State, occupational and personal pensions)
  • interest on most savings
  • income from shares (dividend income)
  • rental income
  • income received by an individual from a trust.

 

A relevant salary sacrifice arrangement is where:

  • an individual gives up employment income in exchange for pension contributions by an employer, and
  • the salary sacrifice arrangement was made on or after 9 July 2015 (whether before or after the start of the employment concerned).

A relevant flexible remuneration arrangement is where:

  • an individual and their employer agree that pension contributions will be made by the employer rather than the individual receive some employment income, and
  • the flexible remuneration arrangement was made on or after 9 July 2015 (whether before or after the start of the employment concerned).

 

For the purpose of a relevant salary sacrifice or relevant flexible remuneration arrangement, ‘a pension contribution by an employer’ means an individual’s employer or some other person

  • paying contributions (or additional contributions) to a pension scheme in respect of the individual or otherwise
  • to secure increased benefits under a pension scheme to which any of the following have an actual or prospective entitlement

  • the individual

  • a dependant of the individual, or

  • any person connected with the individual.

Section 993 of Income Tax Act 2007 defines a ‘connected person’ for this purpose (see PTM027000).

Top of page

Anti-avoidance rule for tapered annual allowance

Section 228ZB Finance Act 2004

Where an individual enters into arrangements that meet the conditions set out below, those arrangements are disregarded for the purpose of calculating the individual’s reduced annual allowance. The amount by which the individual’s annual allowance is reduced due to the tapered annual allowance is treated as being what the reduction would be apart from those arrangements.

The conditions for the arrangements are:

A It’s reasonable to assume that their main purpose, or one of the main purposes, is to reduce the amount of the individual’s reduction under the tapered annual allowance provisions (i.e. under section 228ZA(1) Finance Act 2004)
   
  *  for the tax year, or
  * for two or more tax years which include the tax year.
B They involve reducing the individual’s adjusted income or threshold income for the tax year (or both).
C They involve any of the reductions within condition B immediately above, being redressed by an increase in the individual’s adjusted income, or threshold income, for a different tax year.

 

Note - In condition A immediately above “reduce” includes reduce to nil.

Note - The increase mentioned in condition C immediately above may be an increase in what would be the individual’s adjusted income, or threshold income, for the tax year 2015-16 if the tapered annual allowance provisions:

  • had effect for that year, and
  • did so as if the ‘value of the employer contributions’ (as mentioned in the definition of ‘adjusted income’ in the Income definitions section on this page) were the sum of the value of the employer contributions for the pre-alignment and post-alignment tax years (see PTM058000).

Note – for the purpose of this anti-avoidance rule ‘arrangements’ includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).

Note - the terms ‘arrangements’ and ‘scheme’ are used here in the sense of avoidance devices rather than pension schemes or pension arrangements.

Top of page

Money purchase annual allowance

For individuals who have flexibly accessed a money purchase arrangement and the tapered annual allowance applies to them

  • a £10,000 money purchase annual allowance applies for ‘money-purchase inputs’, and
  • the ‘alternative’ annual allowance applies for ‘other inputs’.

The ‘alternative’ annual allowance is found by subtracting £10,000 from the amount of the reduced annual allowance for the tax year (i.e. following the reduction due to the taper). If the minimum reduced annual allowance of £10,000 applies, the alternative annual allowance is nil.

Where flexible access has occurred the reduced annual allowance will apply unless applying the money purchase annual allowance results in a greater amount being chargeable to the annual allowance charge.

PTM056520 has details about flexibly accessing a money purchase arrangement.

PTM053100 and PTM056510 have details about ‘money-purchase inputs’ and ‘other inputs’.

Top of page

Carrying forward unused annual allowance

Any available unused annual allowance from recent previous tax years can be carried forward and added to the individual’s reduced annual allowance and, when applicable, the individual’s reduced alternative annual allowance.

If a previous tax year is tax year 2016-17 (or a later tax year) and the tapered annual allowance applied to the individual for the same tax year, either

  • the individual’s total pension input amount is tested against the individual’s reduced annual allowance, or
  • if applicable, the individual’s ‘other inputs’ are tested against the individual’s reduced alternative annual allowance

to determine if there is any unused annual allowance to carry forward from that year.

PTM055100 has more details about carrying forward unused annual allowance.

Top of page

Scheme Pays {#}

The tapered annual allowance applying for a tax year does not alter the ‘Scheme Pays’ conditions.  In particular, it remains a requirement that the individual’s total amount of pension savings in the pension scheme for the tax year has to exceed the annual allowance amount in section 228 Finance Act 2004.

For tax year 2016-17, for example, that means the individual’s total amount of pension savings in the scheme has to exceed £40,000 and not the individual’s reduced annual allowance.

PTM056410 onwards has more details about ‘Scheme Pays’.