The Harpur Wealth Management Guide to Tapered Annual Allowance
High earners face a unique set of tax-related challenges that can significantly impact their financial planning. From navigating the complexities of the tapered annual allowance to grappling with the loss of personal allowance, or the risk of annual allowance charges, there are a number of specific tax issues that require careful attention.
In a series of articles, Harpur Wealth Management advisors will focus on these issues. Each article will explore a specific tax concern, shedding light on what it entails, how it operates, and most importantly, the various strategies through which a skilled wealth manager can assist clients in effectively managing these challenges.
What is Tapered Annual Allowance?
The tapered annual allowance is a mechanism that affects high earners as their annual allowance is gradually reduced if their income exceeds £260,000 per year. This reduction is not limited to earned income alone but includes income from all sources. If your employer-provided income falls between £200,000 and £260,000, you may, nevertheless exceed the threshold Because of additional income from other sources which may push you above the threshold.
How Does the Tapered Annual Allowance Impact High Earners?
The tapering process involves a reduction of £1 in the annual allowance for every £2 of income over £260,000, reaching a minimum allowance of £10,000. For example, if your earnings and employer pension contributions total £300,000, your allowance will decrease by £20,000, as you will be £40,000 over the threshold. Consequently, in that tax year, the maximum amount you can contribute to your pension will be £40,000 instead of £60,000.
If your income reaches £360,000, you will be subject to full tapering, resulting in an allowance of only £10,000. In such cases, it may be necessary to explore alternative methods for building your retirement funds. It could be worthwhile to discuss the possibility of receiving additional income instead of pension contributions with your employer.
What is the Threshold Income?
Essentially, ‘threshold income’ can be defined as your total annual income. If you earn £200,000 pa, or below, you do not have to worry about tapered annual allowance, and there’s no need to calculate your adjusted income. If, however, your income exceeds £200,000, an adjusted income calculation is made to determine the amount of tapered annual allowance.
What is an Adjusted Income Calculation?
Adjusted annual income is the calculation an individual’s income for the purpose of determining their eligibility for the tapered annual allowance. It includes the individual’s total income along with the value of all employer pension contributions. This ensures that individuals cannot evade the allowance restriction by exchanging salary for employer contributions.
The employer contribution is calculated as the total pension input amount for the arrangement, minus any contributions made by the individual towards that arrangement during the tax year.
A Case Study
David is married, in his mid-50s and has two children. He doesn’t have a mortgage and his wife is self-employed; her income is small. His income is £160,000, plus a 70% annual bonus. There are significant pension contributions, with a deferred membership of a final salary scheme. David has shares in his employer from a Share Incentive scheme and has accumulated cash which he wishes to invest for his family’s future.
The income plus bonus of £272,000 places him firmly above the tapered annual allowance threshold.
In this instance the following solutions are explored:
- Pension and ISA Investments. One solution involves utilising pension and Individual Savings Account (ISA) investments for David to gain control over investment decisions using tax-efficient products. By maximising contributions to pension schemes and utilising ISAs, the family can benefit from tax advantages and potentially reduce their overall tax liability. David may be able to use pension contributions to reduce his threshold income and avoid the tapering of his annual allowance altogether. This approach ensures that investments are made in a manner that aligns with the family’s financial goals while optimising tax efficiency.
- Alternative Tax Saving Products. Other tax efficient products are available and these should be discussed with your financial adviser to ensure they are appropriate for your individual circumstances.
- Ongoing Review of Pension Contributions and ISA Subscriptions. It’s important to continuously review and monitor pension contributions and ISA subscriptions to ensure they align with the client’s objectives. By regularly evaluating these investments, the family can make adjustments as needed to optimise their financial plans and take advantage of any changes in tax regulations or personal circumstances. This ongoing review helps to ensure that the family’s investment strategy remains effective and aligned with their long-term goals.
How Harpur Wealth Management Can Help
If you have concerns about approaching or potentially exceeding your annual allowance, or if you suspect that your annual allowance might be reduced, Harpur Wealth Management can offer you specialist guidance. Our advisors specialise in providing valuable insights and assistance in such situations.
A wealth management advisor can help you understand the precise amount of your annual allowance, taking into account any unused amounts from previous years that can be carried forward. They can also assess whether you have surpassed your annual allowance, as exceeding it can lead to potential charges.
In case you find yourself in a situation where you have exceeded your annual allowance, an adviser can explore various options to potentially reduce the associated charges. They can provide strategies and recommendations to help manage the impact of exceeding the allowance and mitigate any potential tax liabilities.
At Harpur Wealth we specialise in guiding individuals, families, and businesses through the complex landscape of investments, pensions, savings, and insurance. With our professional expertise and personalised approach, we are dedicated to helping you achieve your long-term financial goals. Our services are designed to provide a comprehensive and tailored solution that aligns with your unique circumstances and aspirations.
Would you like to speak to a Harpur Wealth Management advisor about your annual allowance? Call today for a FREE consultation on 01234 924620
This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions.
The value of your investment can go down as well as up and you may get back less than the amount invested.
‘The Financial Conduct Authority does not regulate taxation advice’