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Tapered Annual Allowance Calculation Example

Mrs Jones pension provides for a 1/80th pension and an automatic lump sum of 3 times the pension. Her contribution rate is 14.5% of her pensionable pay. In addition to a pensionable pay of £131,343, she received £10,000 of investment income and made charitable donations of £5,000 during the 2016/17 tax year. Her pension contributions are £19,045 (ie 14.5% of £131,343).

Step 1 – Checking the threshold income

To determine if Mrs Jones’ annual allowance will be tapered her threshold income is compared against HMRC’s £110,000 limit:

Pensionable pay 

£131,343

Non-pensionable pay

+ £0

Other taxable income

+ £10,000

Pension contributions

- £19.045

Other tax deductible reliefs     

- £5,000

Threshold income

£117,298

As Mrs Jones’ threshold income is over the £110,000 therefore she may be subject to a tapered annual allowance.

Step 2 – Checking the adjusted income

To determine whether, when added together, Mrs Jones’ taxable earnings and the pension input amount are greater than HMRC’s £150,000 limit. Her pension saving statement for 2016/17 confirmed a pension input amount of £60,686:

Threshold income   

£117,298

Pension input amount

+ £60,686

Adjusted income 

£177,984

As Mrs Jones’ adjusted income is over the £150,000 threshold therefore she will have a tapered annual allowance.


Step 3 – Tapered Annual Allowance


The standard annual allowance for tax year 2016/17 is £40,000. This is tapered by £1 for every £2 that the adjusted income exceeds £150,000.

Because Mrs Jones’ adjusted income is £27,984 over the adjusted income limit the tapered annual allowance is £26,008 (£40,000 – (£27,984 ÷ 2)).


Step 4 – Comparing pension contributions against the Annual Allowance


Mrs Jones’ pension input amount is £60,686, which is greater than her tapered annual allowance of £26,008. The £34,678 difference is the chargeable amount by which she has exceeded the annual allowance, potentially being subject to an annual allowance charge.

The annual allowance calculations are on the next pages.


Step 5 – Calculating any Annual Allowance charge


Dr Jones’ has £36,737 of unused annual allowance to carry forward from the previous three tax years. This means she has enough unused annual allowance to fully off set against the £34,678 chargeable amount.

Annual Allowance Calculations

2016/17 Carry Forward Calculation

Carry forward from 2015/16    = £40,000 - £11,822   = £28,178 (post-alignment tax year)

Carry forward from 2014/15    = £40,000 - £50,778    = £10,778Carry forward from 2013/14    = £50,000 - £30,663    = £19,337                                                                                                               

Mrs Jones’ total unused annual allowance to carry forward to 2016/17 is £36,737

 

 

Link to Scottish Government Website