PTM057100 - Annual allowance: tapered annual allowance

Glossary | PTM000001

What is the tapered annual allowance
Who the tapered annual allowance applies to
Threshold income
Adjusted income
Interaction with the money purchase annual allowance
Carrying forward unused annual allowance
Scheme Pays
Anti-avoidance rule for tapered annual allowance

What is the tapered annual allowance

Section 228ZA and paragraph 8(1) Schedule 34 Finance Act 2004

Some high income individuals will have their annual allowance for the tax year reduced.  An individual’s annual allowance will be reduced by £1 for every £2 their Adjusted income is above £260,000 (£240,000 for 2020-21 to 2022-23, and £150,000 for 2016-17 to 2019-20).  If the reduction to be made from the annual allowance is not a multiple of £1, the reduction is rounded down to the nearest £1.

This reduced annual allowance is called the tapered annual allowance and applies from the 2016-17 tax year.

However, the reduction is limited so that an individual’s annual allowance cannot be reduced beyond a certain minimum amount. 

For 2023-24 onwards the tapered annual allowance cannot be reduced to be less than £10,000. 

For 2020-21 to 2022-23 the tapered annual allowance cannot be reduced to be less than £4,000.

For 2016-17 to 2019-20 the tapered annual allowance cannot be reduced to be less than £10,000.

PTM057200 has examples of calculating the tapered annual allowance.

Top of page

Who the tapered annual allowance applies to

2023-24 onwards

For tax year 2023-24 onwards the tapered annual allowance will apply to an individual if: 

If the individuals’ threshold income is not more than £200,000 there is no need to calculate the amount of their adjusted income as the tapered annual allowance cannot apply.  

2020-21 to 2022-23

For tax years 2020-21 to 2022-23 the tapered annual allowance will apply to an individual if:

If the individuals’ threshold income is not more than £200,000 there is no need to calculate the amount of their adjusted income as the tapered annual allowance cannot apply.

2016-17 to 2019-20

For tax years 2016-17 to 2019-20 the tapered annual allowance will apply to an individual if:

If the individual’s threshold income is not more than £110,000 there is no need to calculate the amount of their adjusted income as the tapered annual allowance cannot apply.

Top of page

Threshold income

Section 228ZA(5) Finance Act 2004

An individual’s threshold income is found by taking the following steps:

  1. Start with the individual’s Net income.
  2. ADD The amount that would have been employment income but for the operation of a ‘relevant salary sacrifice arrangement’ made after 8 July 2015.
  3. ADD The amount of that would have been employment income but for the operation of a ‘relevant flexible remuneration arrangement’ made after 8 July 2015
  4. DEDUCT The gross amount of member contributions paid in the tax year using relief at source.  That is the amount physically paid to the pension scheme plus the amount of basic rate relief claimable by the scheme administrator (see PTM044220).
  5. DEDUCT The amount of any lump sum death benefit taxable as pension income of the recipient

PTM057200 has an example of calculating threshold income.

Top of page

Net income

Section 23 Income Tax Act 2007

Net income is the amount found after steps 1 and 2 of section 23 Income Tax Act 2007.  That means, in broad terms an individual’s taxable income left after deducting any reliefs due under section 24 Income Tax Act 2007.

Please note that this is income chargeable to tax before any account is taken of personal allowances, the savings allowance or the dividend nil rate.

An individual’s taxable income could include any of the following:

  • earnings from employment
  • earnings from self-employment/partnerships
  • most pensions income (State, occupational and personal pensions)
  • interest on most savings
  • income from shares (dividend income)
  • rental income
  • income received by an individual from a trust.

‘Net income’ is a concept common to the calculation of an individual’s tax liability; it is not specific to the taxation of pension schemes. 

Individuals should be directed to their financial advisers, or agents who help them with their tax affairs, if they have a question about their net income.   Most, if not all, individuals potentially affected by the annual allowance will be required to file Self Assessment returns. 

Top of page

Relevant salary sacrifice and relevant flexible remuneration arrangements

Section 228ZA(6) Finance Act 2004

A relevant salary sacrifice arrangement is where:

  • an individual gives up employment income in exchange for pension contributions by an employer, and
  • the salary sacrifice arrangement was made after 8 July 2015.

A relevant flexible remuneration arrangement is where:

  • an individual and their employer agree that pension contributions will be made by the employer rather than the individual receive some employment income, and
  • the flexible remuneration arrangement was made after 8 July 2015.

For the purpose of a relevant salary sacrifice or relevant flexible remuneration arrangement, ‘a pension contribution by an employer’ means the individual’s employer, or some other person:

  • paying contributions (or additional contributions) to a pension scheme in respect of the individual or
  • securing increased benefits under a pension scheme to which the individual, any of their dependants, or anyone connected with the individual, have an actual or prospective entitlement.

Section 993 Income Tax Act 2007 defines a ‘connected person’ for this purpose (see PTM027000).

Top of page

Lump sum death benefits taxable as pension income

Section 636A(4ZA) Income Tax (Earnings and Pensions) Act 2003

The following lump sums paid on or after 6 April 2016 may be taxable as pension income.

  • defined benefits lump sum death benefit, (see PTM073100)
  • uncrystallised funds lump sum death benefit (see PTM073200)
  • pension protection lump sum death benefit (see PTM073300)
  • annuity protection lump sum death benefit (see PTM073400)
  • drawdown pension fund lump sum death benefit (see PTM073500)
  • flexi-access drawdown fund lump sum death benefit (see PTM073600)

These lump sums may be paid tax-free or may be subject to tax.  The conditions for tax-free treatment vary between the lump sums. Go to the relevant PTM page to find out when the lump sum is taxable.  If the lump sum is subject to tax, PTM073010 explains when the lump sum is taxable as pension income.

Top of page

Adjusted income

Section 228ZA(4) and paragraph 8(1) Schedule 36 Finance Act 2004

An individual’s adjusted income is found by taking the following steps:

  1. Start with the individual’s Net income.
  2. ADD the amount of any relief given under section 193(4) - claim for excess relief under a net pay arrangement - or 194(1) Finance Act 2004 – relief on making a claim (see PTM044240).  Tax relief is given only when an individual claims it from HMRC.  For individuals completing Self Assessment on the SA100 under the section ‘Tax reliefs’ this will be by completing box 3 for claims for excess relief or boxes 2 or 3 for relief on making a claim.
  3. ADD the amount of member contributions paid via the net pay arrangement (see PTM044230) or with transitional corresponding relief (see PTM111500).  Full tax relief will have been given in respect of these contributions by reducing the amount of the individual’s employment income chargeable to tax.
  4. ADD an amount equal to the individual’s total pension input amount for the year minus the amount of member contributions paid in the tax year
  5. DEDUCT the amount of any lump sum death benefit taxable as pension income of the recipient.

PTM057200 has an example of calculating adjusted income.

Tax relief on member contributions

When an individual makes a contribution under the net pay arrangement (see PTM044230) the contribution is deducted from the member’s pay before tax is calculated.  The payment of the contribution reduces the members’ taxable employment income. 

Tax relief on member contributions with transitional corresponding relief (see PTM111500) is given by deducting the amount of the contributions from the individual’s taxable employment income. 

Contributions paid under the net pay arrangement or with transitional corresponding relief reduce the amount of the individual’s ‘net income’.  For this reason, they are added back to the individual’s income when calculating ‘adjusted income’.

When an individual makes a contribution to a scheme that operates the net pay arrangement but it is not possible for the contribution to be made via the payroll an individual can get tax relief by making ‘a claim for excess relief’ under section 193(4) Finance Act 2004.  The individual must claim the tax relief from HMRC; for individuals filing Self Assessment returns this will be by completing box 3 under the section ‘Tax reliefs’ on the SA100 main tax return.

Some pension schemes do not have to operate relief at source (RAS) and cannot operate the net pay arrangement for certain members.  Examples are retirement annuity contracts and contributions by non-employee members of a public service pension scheme.  Tax relief is given by the individual making a claim under section 194(1) Finance Act 2004.  for individuals filing Self Assessment returns this will be by completing either box 2 or box 3 (as appropriate) under the section ‘Tax reliefs’ on the SA100 main tax return.

Tax relief given under either section 193(4) or 194(1) Finance Act 2004 is a relief deductible at step 2 of the calculation of income tax liability provided at section 23 Income Tax Act 2007.  As a result, such contributions reduce the amount of ‘net’ income’ and so need to be added back to the individual’s income when calculating ‘adjusted income’.  

The calculation does not include specific provision for contributions paid using RAS.  This is because such contributions are paid after tax is calculated on employment income.  As ‘net income’ has not been reduced by a RAS net contribution there is no need to add these contributions back when calculating ‘adjusted income’.

Top of page

Step 4: total pension input amounts minus member contributions

An individual's total pension input amount is the total of pension amounts under all arrangements relating to the member under all registered pension schemes that they are a member of.   How the pension input amount is calculated depends on the type of arrangement. The total pension input amount is calculated as usual.  See the following:

PTM053200 for other money purchase arrangements,

PTM053300 onwards for defined benefits arrangements, and

PTM053400 for cash balance arrangements.

Where the pension input amount arises under a currently-relieved non-UK pension scheme (see PTM113310 for definition) see also:

PTM113320 (for cash balance or defined benefit arrangements) and

PTM113330 (for other money purchase arrangements)

for guidance on how to calculate the pension input amount.

The total of any member contributions paid during a tax year means any contributions paid by:

  • the member, or
  • a third party (other than the member’s employer or a former employer) on behalf of the member.

These are member contributions paid to a:

  • registered pension scheme,
  • qualifying overseas pension scheme (QOPS) and the member is entitled to migrant member tax relief under that scheme for the year (see PTM111200), or
  • non-UK pension scheme in respect of which the member is entitled to UK tax relief under the terms of a double taxation agreement – see PTM111600, or
  • corresponding pension scheme in respect of which the member is entitled to transitional corresponding relief – see PTM111500.

Top of page

Interaction with the money purchase annual allowance

Sections 227ZA, 227B to 227G and 228ZA Finance Act 2004

Individuals who have flexibly accessed their benefits may have the money purchase annual allowance rules apply to them.  PTM056520 provides guidance on the event that can trigger the money purchase annual allowance rules.

If the money purchase annual allowance rules apply the individual may have:  

  • a money purchase annual allowance for ‘money-purchase inputs’, and
  • an ‘alternative’ annual allowance for ‘other inputs’.

PTM053100 and PTM056510 have details about ‘money-purchase inputs’ and ‘other inputs’.

The amount subject to the annual allowance charge (the chargeable amount) is whichever is the greater of the amount found by using:

  • The standard annual allowance, or the
  • Alternative annual allowance plus the money purchase annual allowance.

Where the tapered annul allowance applies to an individual their ‘alternative annual allowance' for a tax year is found by the following calculation:

Tapered annual allowance - money purchase annual allowance amount

When both the tapered annual allowance and money purchase allowance apply for a tax year, the amount subject to the annual allowance charge is whichever is the greater of the amount found by using:

  • The tapered annual allowance, or the
  • Reduced alternative annual allowance plus the money purchase annual allowance.

For tax year 2016-17 the money purchase annual allowance is £10,000.

For tax year 2017-18 to 2022-23, the money purchase annual allowance is £4,000.

For tax year 2023-24 onwards, the money purchase annual allowance is £10,000. 

If the minimum tapered annual allowance applies for a tax year, the minimum reduced alternative annual allowance for the same tax year depends on the year in question:

  • 2016-17 only, the alternative annual allowance is reduced to nil (minimum tapered annual allowance for the year of £10,000 less the money purchase annual allowance for the year of £10,000) 
  • 2017-18  to 2019-20, the alternative annual allowance is reduced to £6,000 (minimum tapered annual allowance for the year of £10,000 less the money purchase annual allowance for the year of £4,000).
  • 2020-21 to 2022-23, the alternative annual allowance is reduced to nil (minimum tapered annual allowance for the year of £4,000 less the money purchase annual allowance for the year of £4,000).
  • 2023-24 onwards, the alternative annual allowance is reduced to nil (minimum tapered annual allowance for the year of £10,000 less the money purchase annual allowance for the year of £10,000). 

Top of page

Carrying forward unused annual allowance

Section 228A Finance Act 2004

Any available unused annual allowance from recent previous tax years can be carried forward and added to the individual’s tapered annual allowance.

The amount available to carry forward from any tax year depends on whether or not

  • the tapered annual allowance, and/or
  • the money purchase annual allowance

applied to the individual for the relevant tax year. 

If for example the carry forward year is 2017-18 when the standard annul allowance was £40,000 and a member had a total pension input amount of £14,000:

  • If normal rules applied to the member, i.e. neither money purchase annual allowance nor tapered annual allowance, £26,000 (£40,000 standard AA - £14,000) may be carried forward.
  • If a £35,000 tapered annual allowance applied to the member but not the money purchase annual allowance, £21,000 (£35,000 tapered AA - £14,000) may be carried forward.
  • If only the money purchase allowance applied to the member, £16,000 (£30,000 alternative AA - £14,000) may be carried forward.
  • If the money purchase annual allowance applied and a £35,000 tapered annual allowance applied, £11,000 (£25,000 reduced alternative AA - £14,000) may be carried forward.

PTM055100 has more details about carrying forward unused annual allowance.

Top of page

Scheme Pays

Section 237B Finance Act 2004

The ‘Scheme Pays’ conditions are not affected by the tapered annual allowance.  To require the scheme administrator to operate ‘Scheme Pays’ the individual’s pension savings under the scheme must be more than the standard annual allowance. For example, in 2016-17 that means the individual’s total pension input amount under the scheme is more than £40,000 and not their reduced annual allowance.

PTM056410 onwards has more details about 'Scheme Pays'.

Anti-avoidance rule for tapered annual allowance

Section 228ZB Finance Act 2004

Where an individual enters into arrangements that meet conditions A to C below, those arrangements are disregarded for the purpose of calculating the individual’s reduced annual allowance.  The term ‘arrangement’ includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).  In this context the terms ‘arrangement’ and ‘scheme’ are used here in the sense of avoidance devices rather than pension schemes or pension arrangements.

The amount by which the individual’s annual allowance is reduced due to the tapered annual allowance is treated as being what the reduction would be apart from those arrangements.

Condition A

Condition A is met where it is reasonable to assume that the arrangement's main purpose, or one of the main purposes, is to reduce the amount of the reduction to the individual’s annual allowance for:

  • the tax year, or
  • two or more tax years which include the tax year.

The term ‘reduce’ includes reducing the reduction to the individual’s annual allowance to nil so that the individual has the standard annual allowance for the year.

Condition B

Condition B is met where the arrangements involve:

Condition C

Condition C is met where the arrangements to reduce either or both the individual's threshold income or adjusted income are redressed by an increase in the individual’s threshold or adjusted income in a different tax year.

The increase may be an increase in what would be the individual’s adjusted income, or threshold income, for the tax year 2015-16 if the tapered annual allowance provisions:

  • had effect for that year, and
  • did so as if the ‘total pension input amount’ (see step 4 of Adjusted income) were the sum of the total pension input amounts for the pre-alignment and post-alignment tax years (see PTM058000).