Tapered Annual Allowance Explained

Annual Allowance

Annual Allowance is how much you and your employer can put into your defined contribution pension scheme each year without paying tax on these savings. If you exceed the allowance, then you will be taxed on the amount above the threshold and you will be faced with an annual allowance charge. 

The annual allowance tax charge will probably negate most (if not all) tax relief on the excess above the annual allowance. This charge is generally taken from your income, but you can request that the charge be met from your registered pension scheme assets (known as Scheme Pays).  

In the year 2022/23, the annual allowance was £40,000.  

Tapered Annual Allowance 

For higher earners, those with an ‘adjusted income’ of over £240,000, there is a reduced annual allowance.  

The reduction works by operating a £1 reduction in the annual allowance for every £2 of adjusted income above £240,000, subject to a minimum annual allowance of £4,000. So, those with an adjusted income of £312,000 or more in a tax year will have a £4,000 annual allowance for that tax year.  

What Is An Adjusted Income? 

Start with your net income for the tax year. This is your earnings from employment and self-employment, interest on savings, dividends, and rental income. 

Add back any tax relief on pension savings, where they were paid before tax relief was given.  

If you are a non-domicile individual (your permanent home is outside the UK), add any relief claimed on pension savings you made to overseas pension schemes. 

Add the amount of pension savings your employer made for you. 

And, finally, deduct the amount of any lump sum death benefits you received from registered pension schemes. 

Alternatively, you can ask a financial advisor to calculate your adjusted income and the tapered annual allowance you will receive. A financial advisor will be able to suggest how you can continue to save towards your retirement without exceeding the threshold.  

Adjusted income Reduction in annual allowance  Annual allowance 
£240,000  £0  £40,000 
£250,000  £5,000  £35,000 (tapered) 
£260,000  £10,000  £30,000 (tapered) 
£270,000  £15,000  £25,000 (tapered)
£280,000  £20,000  £20,000 (tapered) 
£290,000  £25,000  £15,000 (tapered) 
£300,000  £30,000  £10,000 (tapered) 
£310,000  £35,000  £5,000 (tapered)
£312,000  £36,000  £4,000 (tapered) 

Top Tip!  If you would like to save towards your retirement but are at risk of going over your annual allowance, put the money into an ISA or invest it instead to make the most of your savings.  

Annual Allowance is how much you and your employer can put into your defined contribution pension scheme each year without paying tax on these savings. If you exceed the allowance, then you will be taxed on the amount above the threshold and you will be faced with an annual allowance charge.