This blog wont apply to most Phoenix staff but more are caught out each year than expect to be. This is because the tax man defines ‘income’ as gross income fromallsources before deductions. The most common mistake we see amongst staff, is not including their gross rental income, which can soon add up.
Can there ever be a drawback from earning too much money? For very high earners there certainly can be when it comes to putting money into their pension. For the average person, they are able to contribute a maximum of £60,000 per year into their pension. This £60,000 is known as the annual allowance. For high earners, specifically those with income over £260,000, this could be reduced to as low as £10,000.
In order for a reduced annual allowance to apply, you must have a ‘threshold income’ of above £200,000 and an ‘adjusted income’ of above £260,000. Working out both your threshold income and adjusted income can be quite complex, and the stages are set out below:
Start with your taxable income
- •This includes all types of taxable income and is not just your salary, bonus, LTIPs but it includes gross rental income, dividend income, interest on savings etc. Work out your threshold income
- •Starting with your taxable income, subtract any contributions by you that were made to pension schemes using the relief at source method. In your situation, this will be if you are contributing to a SIPP outside of your Phoenix pension, or if you have recently joined from an employer that was using a relief at source scheme (most employers do not use this method but some do. If this is the case, only count your contribution and not theirs);
- •Also subtract any taxable lump sum death benefit you received from any pension scheme (this is unlikely);
- •Finally, you now need to add back the salary sacrifice contributions made by you to your Phoenix scheme (ignoring their contribution). If the sum of the above is less than £200,000 you can stop here and your annual allowance is £60,000. If not, you need to work out your adjusted income:
- •Take your threshold income number that you worked out earlier from step 3 and add back in any pension contributions you made to SIPPs or other pension schemes via the relief at source method which you removed earlier;
- •Then, add back Phoenix’s employer contributions made to your pension scheme (as well as any previous employer’s contributions in the current tax year). This number is your adjusted income. If this number is above £260,000 you will be subject a tapered (reduced) annual allowance.
The tapering of the annual allowance works similarly to the tapering of the personal allowance (between £100,000 and £125,140). For every £2 your adjusted income is over £260,000 you lose £1 of your annual allowance. For example, if your adjusted income was £300,000, you would lose £20,000 of the allowance and have a tapered annual allowance of £40,000. The annual allowance is tapered down to a maximum of £10,000, meaning that if your adjusted income is over £360,000 you are not subject to any additional tapering and your annual allowance is fixed at £10,000.
Despite being subject to tapering, this does not affect your ability to use pension carry forward (this lets you carry forward any unused pension allowances from the previous three years) so you may be able to make a pension contribution larger than your annual allowance for the current year.
The tapered annual allowance can be a very complex area and calculation to work out (particularly if you have multiple income streams and various deductions to make, as the above steps only cover the most common cases) and it is always worth seeking advice to make sure you have done this correctly. If you make a mistake in your calculation, this can result in a much larger than expected tax bill from HMRC.
If you need some help, just call us.
