Tapering Of Annual Allowance For High Income
Today we are going to be talking about the tapering of annual allowance for high income. This measure will restrict pensions tax relief by introducing a tapered reduction in the amount of the annual allowance for individuals with an adjusted income of over £150,000 and a threshold income over £110,000.
The Budget proposals announced on 8 July 2015 and Finance Bill 2015 included provisions for reducing the annual allowance for those with taxable incomes of over £150,000.
From 6 April 2016, individuals who have taxable income for a tax year of greater than £150,000 will have their annual allowance for that tax year restricted. It will be reduced, so that for every £2 of income they have over £150,000, their annual allowance is reduced by £1. Any resulting reduced annual allowance is rounded down to the nearest whole pound.
The maximum reduction will be £30,000, so anyone with income of £210,000 or more will have an annual allowance of £10,000. High income individuals caught by the restriction may therefore have to reduce the contributions paid by them and/or their employers or suffer an annual allowance charge.
The income definition will be net income plus the value of any pension savings for the year, but less the amount of certain lump sum death benefits paid to the individual during the tax year. This is known as adjusted income. To provide further clarity and to ensure that the addition of pension savings doesn't affect lower paid individuals, there is another definition of income - threshold income.
Threshold income will normally be the individual's net income for the year, less the amount of certain lump sum death benefits paid to the individual during that tax year and less gross pension contributions paid under the relief at source system.
Those with a threshold income that doesn't exceed £150,000 less the normal annual allowance for the tax year won't be subject to the reduction regardless of the level of their adjusted income. As the annual allowance for 2016/17 will be £40,000, the individual would need to have threshold income above £110,000 to be affected in 2016/17.
Net income is basically total taxable income less reliefs such as trading and share loss relief. Relief under the net pay arrangement can also be deducted and any relief on making a claim (i.e. where all relief is claimed via the individual's tax return).
The net pay arrangement is where employee contributions to occupational pension schemes are deducted by the employer before calculating tax under PAYE.
Adjusted income is:
- individual's net income, plus
- any relief under the net pay system (i.e. it's added back in), plus
- any relief on making a claim (again, added back in), plus
- relief claimed by non-domiciled individuals to overseas pension schemes, plus
- the value of any employer contributions for the tax year but less
- any lump sum death benefits received which is subject to tax because the deceased died at age 75 or more.
Threshold income is:
- individual's net income, plus
- any employment income given up for an employer pension contribution as a result of any salary sacrifice made on or after 9 July 2015, less
- Gross pension contributions paid under the relief at source method, less
- any lump sum death benefits received which is subject to tax because the deceased died at age 75 or more
For defined benefit and cash balance arrangements, the employer contributions will be the pension input amount for the scheme for the tax year using the normal annual allowance rules less any member contributions paid.
To avoid individuals entering into a salary exchange or a flexible remuneration arrangement after 9 July 2015 so they received additional pension contributions but reduce their adjusted or threshold income anti-avoidance rules have been put in place.
The anti-avoidance rules apply if:
- it is reasonable to assume that the main purpose for the change to the salary exchange or flexible remuneration agreement is to reduce the individual's adjusted or threshold income (this includes any reductions to nil),
- the change affects their income in either the current tax year or two or more tax years, including the current tax year,
- in return for the income being reduced the individual receives an increase in their adjusted or threshold income in a different tax year.
If the anti-avoidance rules apply then the income used to calculate the reduction to the annual allowance for that tax year is the one before any adjustments were made.
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