Trying to understand pension taper

anything123

Hey,

I'm about to find myself subject to the pension taper. While I think my scenario is pretty simple, I can't make head nor tail of the guidelines here, so please forgive my ignorance if this is a well understood and/or commonly asked question.

So next year's salary should be around £170k. I can salary sacrifice to the company pension scheme (it's a regular pension that works like a trading account, similar to a SIPP). My employer will contribute around £10k, leaving me £30k to the normal annual limit.

If I salary sacrifice £20k, does this bring my adjusted income below £150k, and so I'm not subject to the taper?

Cheers,

Marcon

Probably easiest for you to give TPAS a call for free, expert and impartial help: https://www.pensionsadvisoryservice.org.uk

hugheskevi

If I salary sacrifice £20k, does this bring my adjusted income below £150k, and so I'm not subject to the taper?

No.

Your Adjusted Income is your Net Income (ie your taxable income) plus Pension Input (ie the total amount going into the pension from yourself and your employer).

You would have to sacrifice about £60K to bring your Threshold Income (which is probably just your taxable income) below £110,000 to avoid being affected by the taper.

anything123

Thanks folks for the quick responses - very helpful indeed!

Quick follow up, am I right in saying that carry over allowances are additive? So let's say I have £20k unused allowance from the previous 3 years. This year I have allowance of £30k due to taper. Can I add these together to give £50k allowance for next year?

hugheskevi

Quick follow up, am I right in saying that carry over allowances are additive? So let's say I have £20k unused allowance from the previous 3 years. This year I have allowance of £30k due to taper. Can I add these together to give £50k allowance for next year?

You add them together to give you the amount you can contribute to a pension this year.

Assuming you contributed the maximum possible, you would then have zero carry-forward available for next year, and the limit would just be your tapered Annual Allowance.

If you did not contribute the maximum, you may have some carry-forward to apply next year, it would depend on which year the unused Annual Allowance fell within.

anything123

Ah yeah sorry, mixed up this year and next. I think there's a bit sitting unused from a few years back, need to run the numbers. But effectively that's the principle, that unused allowance can be carried forwards, even into a tapered year?

hugheskevi

But effectively that's the principle, that unused allowance can be carried forwards, even into a tapered year?

Yes.
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dudload

quick check for me here, when you say taxable income - is that what is on the P60 (and will match to the self service HMRC website when you click on view taxable income from previous years?)

Quite a few of the websites seem contradictory here as their flowcharts start at total income (e.g. a salary of £160k). My view is that if your salary is £160k and I'm making salary sacrifice of £20k with employer contribution of £10k, then the taxable income is £140k, matching the HMRC website and P60.

This would then give a threshold income of £160k and adjusted income of £170k. Is my thinking correct?

hugheskevi

This page at gov.uk is quite helpful.

P60 will have taxable income from an employment, but remember to include things like interest even if within the £500 tax free allowance, dividends (from investments outside pensions and ISA), etc.

If your salary is £160K and you salary sacrifice £20K into a pension, then your taxable income from that salary is £140K. Your thinking seems correct.