Andrew Phipps: Getting to grips with the new tapered annual allowance

Andrew Phipps delves into the latest tapered annual allowance rules and concludes planning is essential

The Spring 2020 Budget saw some key changes to the tapered annual allowance rules – most notably, increasing the threshold income and adjusted income limits at which the taper begins to apply.

Under the previous rules, an increasing number of people were reporting pension contributions in excess of the annual allowance. In the 2017/18 tax year, 26,550 individuals reported pension contributions exceeding their annual allowance in their self-assessment tax return. In addition, between the 2016/17 and 2017/18 tax years, contributions exceeding the limit increased by 40% from £578m to £812m. Given the number of individuals affected, it’s worth being clear on the implications.

The old rules

Under the old tapered allowance rules, covering the tax years 2016/17 to 2019/20, individuals are subject to tapering where their adjusted income for the period is over £150,000 and their threshold income is over £110,000. For every £2 over the adjusted income limit, their £40,000 annual allowance is tapered by £1, down to a possible £10,000 minimum annual allowance.

For example, if a person’s adjusted income was £170,000, that would put them £20,000 over the adjusted income limit, meaning their annual allowance would be tapered by £10,000 – leaving them with a tapered annual allowance for that tax year of £30,000.

The new rules

This is where the changes come in. From the 2020/21 tax year onwards, new tapered annual allowance rules will apply – raising the adjusted income and threshold income limits to £240,000 and £200,000 respectively. This means a person’s adjusted income would have to be over £240,000 and their threshold income over £200,000 before their annual allowance is subject to tapering. The rate of tapering remains unchanged, with a reduction of £1 for every £2 over the adjusted income limit.

What does this mean? This will leave director business owners with greater scope to increase their salaried income, as well as dividend income, without being impacted by tapered annual allowance rules. The new rules do, however, dictate a lower minimum allowance, which will decrease from £10,000 to £4,000, meaning some higher earners may have their annual allowance further restricted.

Carrying forward unused AA from tax years 2017/18, 2018/19 and 2019/20

Clients will need to check to see if they were impacted by the tapered annual allowance rules in place in those tax years.

If carrying forward unused annual allowance into current tax year 2020/2021, the client also needs to check to see if they were impacted by tapered annual allowance rules in place in the 20/21 tax year.

But before we go into some examples, a few important definitions first.

What is adjusted income?

A. client’s adjusted income is made up of:Total taxable income (include all earnings and investment income)*; plus

B. Employee contributions paid via a net pay arrangement; plus

C. Employer contributions; plus 

D. Any relief claimed by non-domiciled individuals for making contributions to overseas pension schemes; less

E. Any lump sum death benefits in respect of post-75 deaths

*Taxable income could include any of the following: earnings from employment; earnings from self-employment/partnerships; most pensions income (state, occupational and personal); interest on most savings; income from shares (dividend income); property/rental income; income received by an individual from a trust.

What is threshold income?

A member’s threshold income is made up of:

A. Total taxable income, as above; plus

B. Salary sacrifice arrangements entered into on or after 9 July 2015; less

C. Gross personal contributions paid to schemes operating Relief at Source (RAS); less 

D. Any lump sum death benefits in respect of post-75 deaths

So – tapered or non-tapered?


Jane’s salary is £205,000 and her employer contribution is £80,000.

This means she has:

  • Adjusted income of £285,000 (£205,000 + £80,000)
  • Threshold income of £205,000 (£205,000 – £0)

Since she is over both the adjusted and threshold income limits, her annual allowance will be subject to tapering.

The excess of her adjusted income is £45,000, meaning her annual allowance will be tapered by £22,500.

This leaves her with an annual allowance of £17,500.


John’s salary is also £205,000, but he has an employer contribution of £75,000 and an employee contribution of £5,000 (relief at source).

This means he has:

  • Adjusted income of £280,000 (£205,000 + £75,000)
  • Threshold income is £200,000 (£205,000 – £5,000)

Although John’s adjusted income is £40,000 over the limit, his threshold income doesn’t exceed £200,000, so he won’t be tapered.

This leaves him with a full annual allowance of £40,000.

Planning is crucial

The effects of the taper on retirement planning are significant. Understanding where clients sit in regard to the application of the taper will be vital to interpreting the implications, and essential for planning purposes.

Andrew Phipps is product marketing manager at Embark Group