What Is the Tapered Annual Allowance?
The tapered annual allowance is a mechanism that reduces the standard £60,000 pension annual allowance for individuals with high incomes. It was introduced in April 2016 to limit the tax relief available to the highest earners.
The taper works by reducing the annual allowance by £1 for every £2 of adjusted income above £260,000, down to a minimum annual allowance of £10,000. This means the taper fully applies once adjusted income reaches £360,000.
However, the taper does not automatically apply just because you have high income. Two separate income tests must both be met before the taper kicks in.
The Two Income Tests
For the tapered annual allowance to apply, you must exceed both of these thresholds:
- Threshold income must be over £200,000
- Adjusted income must be over £260,000
If your threshold income is £200,000 or less, the taper does not apply regardless of your adjusted income. This is an important planning point.
Threshold income
Threshold income is broadly your total taxable income from all sources, minus any personal pension contributions made through relief at source. It includes:
- Employment income (salary, bonuses, benefits in kind)
- Self-employment profits
- Rental income
- Investment income (dividends, interest, capital gains)
- Minus personal pension contributions (relief at source only)
Adjusted income
Adjusted income is your threshold income plus employer pension contributions and the increase in the value of any defined benefit pension rights during the tax year. It includes:
- Your threshold income
- Plus employer pension contributions
- Plus the value of defined benefit pension accrual (calculated using a formula)
- Plus salary sacrifice amounts redirected to pension
How the Taper Reduces Your Allowance
| Adjusted Income | Taper Reduction | Remaining Annual Allowance |
|---|---|---|
| £260,000 or less | None | £60,000 |
| £270,000 | £5,000 | £55,000 |
| £280,000 | £10,000 | £50,000 |
| £300,000 | £20,000 | £40,000 |
| £320,000 | £30,000 | £30,000 |
| £340,000 | £40,000 | £20,000 |
| £360,000 or more | £50,000 | £10,000 |
Worked Examples
Example 1: Senior manager with a salary of £220,000
Sarah earns £220,000 in salary. Her employer contributes £30,000 to her defined contribution pension, and she makes personal contributions of £25,000 (gross) through relief at source.
- Threshold income: £220,000 − £25,000 = £195,000
- Because threshold income is below £200,000, the taper does not apply
- Sarah has the full £60,000 annual allowance
- Total pension contributions: £30,000 + £25,000 = £55,000 – within the allowance
Example 2: Company director earning £310,000
James earns £310,000 from his directorship and has £15,000 in dividend income. His employer makes pension contributions of £40,000 via salary sacrifice.
- Threshold income: £310,000 + £15,000 − £0 (no personal contributions) = £325,000
- Adjusted income: £325,000 + £40,000 = £365,000
- Both tests exceeded, so the taper applies
- Taper reduction: (£365,000 − £260,000) ÷ 2 = £52,500, but capped at £50,000
- Tapered allowance: £60,000 − £50,000 = £10,000
- James has exceeded his £10,000 allowance by £30,000 and faces an annual allowance charge
Strategies for Managing the Taper
1. Make personal pension contributions
Personal pension contributions through relief at source reduce your threshold income. If this brings your threshold income to £200,000 or below, the taper does not apply, even if your adjusted income would otherwise exceed £260,000.
2. Use salary sacrifice carefully
Salary sacrifice reduces your salary (and therefore threshold income) but the sacrifice amount is added back as an employer contribution when calculating adjusted income. In some cases, salary sacrifice can help; in others, it makes no difference to the taper calculation. Detailed modelling is essential.
3. Time bonuses and income
If you have control over when bonuses or other income are received, timing them across different tax years can help manage which years you exceed the taper thresholds. This requires careful planning and professional advice.
4. Use carry forward
Even with a tapered allowance, you can use carry forward of unused annual allowance from the previous three tax years. The carry forward amount is based on your actual annual allowance in each previous year (including any taper), minus the contributions made in that year.
5. Consider alternative savings
If the taper significantly limits your pension contributions, you may want to redirect savings into ISAs, VCTs, EIS investments, or other tax-efficient vehicles. A financial adviser can help you evaluate the options.
Defined Benefit Pension Accrual
Calculating adjusted income is more complex if you are a member of a defined benefit (final salary or career average) pension scheme. The pension input amount for a DB scheme is calculated using a specific formula:
Pension input = (closing value − opening value) − CPI increase on opening value
The closing value is the annual pension multiplied by 16, plus any lump sum. This means a pay rise in a DB scheme can create a significant pension input amount that pushes you over the taper thresholds. This is particularly relevant for NHS doctors, senior civil servants, and other public sector workers in DB schemes.
The NHS and Tapered Annual Allowance
The tapered annual allowance has caused particular problems in the NHS, where senior doctors in the NHS Pension Scheme (a defined benefit scheme) found that pay rises and additional shifts pushed them into annual allowance charges. The government introduced the Scheme Pays facility and various NHS-specific adjustments to address the problem, but it remains a complex area.
If you are a senior NHS worker, specialist advice from a pensions adviser familiar with the NHS scheme is strongly recommended. Our free matching service can connect you with a suitable adviser.
Annual Allowance Charge and Scheme Pays
If you exceed your tapered annual allowance, you must report the excess on your Self Assessment tax return and pay the annual allowance charge. If the charge exceeds £2,000, you may be able to use the Scheme Pays facility, where your pension scheme pays the charge on your behalf and reduces your future benefits accordingly.
Record Keeping
Managing the tapered annual allowance requires meticulous record keeping. You should track:
- Your threshold income and adjusted income for each tax year
- All pension contributions (personal and employer) including salary sacrifice amounts
- Defined benefit pension accrual values
- Unused annual allowance available for carry forward
- Any pension input periods that do not align with the tax year