Why it pays to review your pension if you earn over £150,000  

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Are you earning ‘too much’ money in the eyes of the taxman?

No matter how much you earn, it’s always unpleasant to be hit by an unexpected tax bill. Especially when it’s due to an unclear, not-very-well-publicised rule change. So, what is this rule change? In a word: tapering.

If you earn over £150,000, then your pension annual allowance will be subject to tapering, due to rules that were introduced back in 2016. Currently, you’re allowed to put either 100% of your earnings, or £40,000 a year (whichever is lower), into your pension and receive tax relief at your highest marginal rate. This allowance can be carried forward for up to three years – so long as you were a registered member of a pension scheme in each of those years.

However, for every £2 of income earned over £150,000, you lose £1 in annual allowance for tax-relievable pension contributions. Once you earn £210,000 per year, the reductions cease, and you’ll be left with the minimum annual allowance of £10,000 (unless you’re drawing on a money purchase pension, in which case you’ll be subject to the £4,000 money purchase annual allowance (MPAA)).

However, an earnings level of £150,000 on your P60 does not necessarily equate to a net income of £150,000 for annual allowance calculation purposes. That’s because the reduction is based on ‘adjusted’ income, which counts pension contributions from both you and your employer. This means that additional rate taxpayers and their employers may need to contribute less into their pensions – or else risk overpaying on tax.

How easy is it to get caught out?

The situation is further complicated by another element HMRC have added into the mix, called ‘threshold income’. This is your net income, less pension contributions and certain benefits paid for through salary sacrifice. If your threshold income turns out to be less than £110,000 a year, then you will not be subject to the tapering rules.

To add a final layer of complexity, HMRC calculates both adjusted and threshold income using net income, i.e. all taxable income less certain reductions.

The Government’s website contains a longer explanation of tapering rules in further detail. However, it can be helpful to speak to a financial adviser when it comes to complex pension planning, to ensure you’re not overlooking any crucial details.

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