Tapered annual allowance, explained

The tapered annual allowance is a mechanism introduced by the Government to gradually reduce the annual allowance for high-income earners, aiming to limit the amount of tax relief individuals with significant earnings can claim on their pension contributions. As part of our Bitesize Technical series, Senior Technical Consultant, Joshua Croft, explains the rules around the tapered annual allowance.

Watch the bitesize video now or scroll down to read through the key talking points.

Key insights on the tapered annual allowance

How does the tapered annual allowance work?

It's based on two factors: adjusted income and threshold income. Adjusted income includes all taxable income plus pension contributions, while threshold income includes taxable income minus personal contributions entitled to tax relief.

When does the tapered annual allowance apply?

The taper applies if adjusted income exceeds £260,000 and threshold income exceeds £200,000.

What is the impact of the taper on the annual allowance?

For every £2 of adjusted income over £260,000, the annual allowance reduces by £1, with a cap at £50,000. This means the minimum annual allowance an individual can have is £10,000. The full taper applies for adjusted income over £360,000.

Can individuals still use carry forward with the tapered annual allowance?

The tapered annual allowance does not prevent individuals from using carry forward. Tapered annual allowance can be carried forward in the same way as the standard annual allowance.

More Bitesize Technical

Annual allowance explained

Learn more about annual allowance. Watch the video here.