The Tapered Annual Allowance (AA) for Pensions

From 2016/17, individuals who have income for a tax year of greater than £150,000 will have their AA for that tax year restricted.

It will be reduced by £1 for every £2 of income over £150,000, to a minimum AA of £10,000. If the individual is a high-income individual for the tax year, the AA is reduced by:

(T-£150,000) x (AA-£10,000)/£60,000

where T is the adjusted income for the tax year, rounded down to the nearest £1.

The individual is a 'high-income individual' for the tax year if their adjusted income is more than £150,000 and the individual's threshold income for the tax year is more than the amount given by £150,000 minus the normal AA for the year i.e. £110,000 for 2016/17.

'Adjusted income' is:

• the individual's net income for the year (per Step 2 s23 ITA 2007 i.e. after certain reliefs such as losses); plus
• the amount of any relief under ss193(4) or 194(1) FA 2004 deducted at that Step and the amount of any deductions made from employment income of the individual for the year under s193(2) FA 2004 or under Chapter 2 Part 5 ITEPA 2003 in accordance with para 51(2) Sch 36 ITEPA 2003 (i.e. net pay arrangements); plus
• the total pension input amount less the amount of any contributions paid by or on behalf of the individual during the year under registered pension schemes of which the individual is a member (i.e. employer contributions); less
• the amount of any lump sum which accrues in the year in relation to which s579A ITEPA 2003 is applied by s636A(4ZA) ITEPA 2003 (certain lump sum deaths benefits).

'Threshold income' is:

• the individual's net income as above; plus
• any amount by which what would otherwise be general earnings or specific employment income of the individual for the year has been reduced by relevant salary sacrifice or flexible remuneration arrangements in relation to employer pension contributions; less
• the amount, before any deduction under s192(1) FA 2004, of any contribution paid in the year in respect of which the individual is entitled to be given relief under s192 FA 2004 (relief at source); less
• the amount of any lump sum which accrues in the year in relation to which s579A ITEPA 2003 is applied by s636A(4ZA) ITEPA 2003 (certain lump sum deaths benefits).

As you can see, the rules are not straight-forward. Some of you may feel that it is for financial advisers to point out to clients that they may be affected by these rules. However, I think it is good practice to make those clients whose income is somewhere in excess of £100,000 aware that they may be affected - although when the exact figures will be known is a different matter! (28 January 2018 for some!)