Higher rate tax payers
If you are a higher rate or additional rate tax payer your annual allowance may differ to that of a basic rate tax payer. As basic rate tax payer you can receive tax relief on personal contributions up to 100% of your earnings, or £3,600 (if you do not have relevant earnings).
To work out if you are affected you will need to look at your threshold and then the adjusted income.
Threshold income
To work out your threshold income add:
- Taxable earnings (including salary, bonuses and commission after any salary sacrifice or employer pension contributions)
- Rental income from property
- Dividends
- Interest on savings
- Self-employed earnings
If your threshold income is below £110,000 you will not be affected and your annual allowance will remain at £40,000.
Example 1: Tom's annual allowance will not be reduced
Salary: £100,000
Personal pension contribution: £20,000
Employer pension contribution: £10,000
Buy-to-let rental income: £6,000 per year
To work out Tom's threshold income subtract the personal pension contribution from his salary and add on the employer contribution and rental income.
£80,000 + £10,000 (employer contribution) + £6,000 (rental income) = £96,000
As his threshold income is £96,000 (below £110,000) his annual allowance will remain at £40,000.
Adjusted income
If your threshold income is above £110,000 you will need to refer to your adjusted income, and your annual allowance could be reduced to £10,000 per year. For every £2 of income over £150,000 you earn, your annual allowance will fall by £1 (for example, if you earn £170,000 you new annual allowance would be £30,000. This is because £170,000 - £150,000 = £20,000. Half of £20,000 is £10,000, and £10,000 is subtracted from the original annual allowance of £40,000). This tapering stops when you earn earn £210,000 at a £10,000 annual allowance.
To work our your adjusted income add:
- Taxable earnings (including salary, bonuses and commission after any salary sacrifice or employer pension contributions)
- Benefits built up in a defined benefit scheme
- Any contributions you may have to an occupational/trust based pension scheme.
Example 1: Richard's annual allowance will be reduced
Salary: £180,000
Salary sacrifice: £25,000
Employer pension contribution: £10,000
Dividend income: £5,000 per year
We must first look at the threshold income. To work out the threshold income subtract the salary sacrifice from the salary, and add on the employer pension contribution and dividend income:
£155,000 + £10,000 (employer contribution) + £5,000 (dividend) = £170,000
Richard's threshold income is £160,000 (above £110,000) so he must now look at his adjusted income.
To work out the adjusted income you must add the salary (as face value before any salary sacrifice), employer contributions and dividends.
His adjusted income is £195,000. So, to calculate the reduction in allowance:
£195,000 (adjusted income) - £150,000 (tapering begins) = £45,000£45,000/2 = £22,500
£40,000 (standard annual allowance) - £22,500 = £17,500 (tapered allowance)
Richard's annual allowance will be tapered to £17,500.
Example 2: Lisa's annual allowance will not be reduced
Salary: £110,000
Personal pension contribution: £20,000
Employer pension contribution: £20,000
Rental income: £5,000
To work out Lisa's threshold income subtract her personal contribution from her salary, and add her employer contribution and rental income:
£90,000 + £20,000 (employer contribution) + £5,000 (rental income) = £115,000
As Lisa's threshold income is £115,000 (above £110,000) we must work out her threshold income. This is worked out by adding her salary to her employer pension contributions and rental income:
£110,000 (salary) + £20,000 (employer contribution) + £5,000 (rental income) = £135,000Her adjusted income is £135,000, which is below £150,000. Therefore her annual allowance will remain as £40,000.
How can you take advantage of what used to be a great annual allowance?
If you have not used your full allowance in the past three years you could use the Carry Forward rule.
The principle is fairly straightforward: if you have not used your full allowance in the past three years, Carry Forward could allow you to make up for that. The below example should help illustrate the principle:
| Annual allowance | Total contributions | What can be carried forward | |
| 2014/15 | £40,000 | £40,000 | £0 |
| 6 April 2015 - 8 July 2015 | Up to £80,000* | £0 | £0 |
| 9 July 2015 - 5 April 2016 | Up to £40,000* | £20,000 | £20,000 |
| 2016/17 | £40,000^ | £10,000 | £30,000 |
Based on the above you could carry forward £50,000, meaning you could invest £90,000 in this tax year.**
* In 2015/2016 the rules were slightly amended to align the pension contribution year to the tax year. During this year you were able to invest twice, allowing you to invest up to £80,000.
^2016/2017 and 2017/2018 saw the introduction on the tapered allowance. If you earn over £110,000 your annual allowance could be reduced to £10,000. This would mean the amount you could carry forward would also be reduced. You can find out more about the tapered allowance here.
**Please be aware, the amount of tax relief you will receive depends on individual circumstances, and this may change over time. You must have been a member of a UK-registered pension scheme in each of the year from which you are carrying forward, even if you have not made contributions. You can only contribute as much as you earn, and receive tax relief.