For high earners there’s the potential to save a considerable amount of money for those later years in life through good financial planning. However, as the new pension allowance ‘taper’ rules set in, many taxpayers earning over £100,000 are unaware of changes and put themselves at risk of unexpected tax bills and penalties from HMRC.
We explain what these new pension allowance rules are, and what you can do to properly manage your pension contributions as a high earner. Remember that the advice on this page is general and can only offer so much information – if you are worried about pension contributions, we strongly recommend that you talk to an accountant.
For the majority of people, the annual allowance for pension contributions is £40,000 per year – that includes contributions from employers, the government’s pension tax relief, final salary scheme benefits, and any other personal contributions.
However, for high earners there is what’s known as a ‘tapered’ annual allowance, which can significantly reduce the amount that you can contribute, down to £10,000 minimum. You are affected if your threshold income is more than £110,000 AND your adjusted income is more than £150,000.
- Threshold income = total taxable income + any salary sacrifice or bonus sacrifice for pension contributions – any personal pension contributions
- Adjusted income = total taxable income after any reliefs + any employer pension contributions
Threshold income includes all sources of income, not just your salary – so any buy-to-let properties or investments will count here too. You might be able to work out the position yourself it is tricky, but not impossible.- but the best way to be sure of how this taper will impact you personally is to consult an accountant.
One key point to remember here is that BOTH threshold and adjusted income need to be over the limit for you to be affected by the tapered annual allowance. If either is below the limit, you’re still eligible to make £40,000 in pension contributions a year.
If you haven’t used all of your allowance from any of the previous three tax years, you may be able to bring this amount forward – potentially up to a maximum of £160,000. The annual allowance has been set at £40,000 since the 2015/16 tax year.
To be eligible to carry forward allowance from previous years, you need to meet two criteria:
- You need to have been a member of a UK-registered pension scheme for each of the tax years you wish to carry allowance forward from, even if you didn’t make a contribution
- You need to earn at least as much as the total amount you wish to contribute in the current tax year (so if you wish to carry forward £140,000 from previous years’ allowances, you would need to have £140,000 of earnings in the current tax year)
If you are a high earner as-yet unaware of the tapered allowance, you may have over-contributed to your pension allowance by mistakenly assuming that the £40,000 limit applies to you.
The government has estimated that over 300,000 people are in this situation, having over-contributed, so you’re not alone.
You may be able to reduce or eliminate the excess by using the ‘Carry Forward’ as described above. There are other options too for minimising the impact of over-contributions, such as having the excess charge deducted from your pension scheme if it’s over £2,000. Anything left over will be added to your income and taxed at your highest rate.
However, if you’ve accessed your pension pot using the pension freedom rules introduced in April 2015, your annual allowance is now cut to £4,000 and carry forward cannot be used.
We know how difficult it can be as a high earner to work out how much you can contribute to your pension. Our clients in the NHS, for example, only find out six months after the end of the tax year how much their pension pot has increased by, meaning that they’re left with just a few short months to coordinate the tax bill payments with their pension scheme.
If you think you’ve over-contributed to your pension in recent years, or if you’d like advice on pension contributions as a high earner, get in touch with Warr & Co. We are experienced personal accountants and can recommend the best course of action for you individually.