What else can affect the annual allowance calculations

The Tapered Annual Allowance (TAA)

The government continually monitors the Annual Allowance and from 6th April 2016 introduced a new ‘factor’ for higher earners.

From the 2016/17 tax year to the 2019/20 tax year, the standard £40,000 AA initially reduced to a minimum of £10,000 for those with a ‘threshold income’ of over £110,000, and an ‘adjusted income’ of over £150,000.

In effect, for every £2 of earnings over £150,000 the AA was reduced by £1. Therefore, once an ‘adjusted income’ of £210,000 was reached, the minimum £10,000 applied.

From the 2020/21 tax year to the 2022/23 tax year, the thresholds for triggering a tapered AA increased, while the lowest possible tapered AA decreased. The standard £40,000 AA reduced to a minimum of £4,000 for those with a ‘threshold income’ of over £200,000, and an ‘adjusted income’ of over £240,000.

This was then altered again from the 2023/24 tax year. The standard AA is now £60,000. A tapered AA is triggered by ‘threshold income’ of over £200,000, and an ‘adjusted income’ of over £260,000. The lowest possible tapered AA has been returned to £10,000.

To help you understand more about these tax terms and how they are calculated, please see the following:

HMRC Definition of Threshold Income

  1. Calculate your taxable income for the tax year from all sources
  2. Deduct any tax reliefs that apply, like payments made to your pension scheme that had tax relief but were paid before the relief was given
  3. Deduct the gross amount of your pension savings from all schemes (where tax relief has been given at source)
  4. Deduct the amount of any lump sum death benefits you received from registered pension schemes
  5. Add any reduction of employment income for pension provision through any relevant salary sacrifice arrangements made after 8 July 2015
  6. Add any reduction of employment income for pension provision through any relevant flexible remuneration arrangements made after 8 July 2015

Adjusted Income

  1. Calculate your taxable income for the tax year from all sources
  2. Deduct any tax reliefs that apply, like payments made to your pension scheme that had tax relief but were paid before the relief was given
  3. Add the amounts of claims made for tax relief on pension savings where they were paid before tax relief was given
  4. Add pension savings made to your pension schemes where tax relief was given
  5. Deduct the amount of any lump sum death benefits you received from registered pension schemes

The Tapered Annual Allowance (TAA) – April 2020

Following a review of these measures in the April 2020 Budget there were increases the income limits used in calculating a tapered annual allowance and decreases the minimum tapered annual allowance.

The Threshold Income was increased from £110,000 to £200,000. The Adjusted Income was increased from £150,000 to £240,000. The minimum tapered annual allowance also decreased from £10,000 to £4,000.

It is important to note that the income is derived from ALL assessable income, not just PAYE from NHS employment.  Where an individual’s pension savings exceed the annual allowance, any excess will be taxed at a members marginal income tax rate.

The Tapered Annual Allowance (TAA) – April 2023

Following another review of these measures in the April 2023 Budget, the Adjusted Income required to trigger tapering has increased from £240,000 to £260,000. The Threshold Income remains at £200,000.

The minimum tapered annual allowance has been returned to its previous value of £10,000.

Top-ups to the NHS Pension

You may be paying to top-up your NHS Pension through an old Added Year (AY) contract or the current Additional Pension Purchase (APP).

Either of these will further us up part of your Annual Allowance and you will need to see if this has impacted you.

Private Pensions

If you are paying to a private pension; Personal (PPP), Additional Voluntary (AVC), or Free Standing Additional Voluntary (FSAVC) plan of any sort you will need to add on the GROSS payments made into these plans during the relevant Tax Year (also known as a Pension Input Period (PIP).

What about the Tax Implications?