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Tax Insider Tip: Pension Contributions And High Earners

27th Nov 2015
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High earners with income in excess of £150,000 (including pension contributions) may wish to make the most of available allowances in 2015/16 as from 2016/17 the annual allowance will be tapered The annual allowance will be reduced by £1 for every £2 by which adjusted net income exceeds £150,000, subject to a maximum reduction of £30,000.

Adjusted net income includes any pension contributions. These changes mean that where a person has adjusted net income of £210,000 or above for 2016/17 they will only have an annual allowance of £10,000 available for that year (subject to unused amounts carried forward from earlier years).

Anyone who is affected by this measure may wish to maximise the contributions that they are able to make in 2015/16, particularly if they have unused allowances from 2012/13 (which may be up to £50,000) as these are lost if not used in 2015/16.

Example:
John has adjusted net income of £180,000 in 2015/16 and he expects his income to remain at this level for 2016/17.

As his adjusted net income exceeds £150,000, his pensions annual allowance will be reduced in 2016/17. The allowance of £40,000 is reduced by £1 for every £2 by which he income exceeds £150,000. The allowance is therefore reduced by £15,000 (1/2 (£180,000 - £150,000)). His allowance for 2016/17 is therefore £25,000 (£40,000 - £15,000).

Assuming John has made pension contributions up to the level of the annual allowance in previous years and has no unused allowances to carry forward, if he makes pension contributions in excess of £25,000 in 2016/17 he will suffer an annual allowance charge.

 

This is a sample tip taken from our 136 page guide:
101 Ultimate Tax Strategies Revealed.

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