Tapering the annual allowance and carry forward

Hi All

A client wants to make an employer pension contribution to utilise her remaining unused allowance for the current tax year and the previous 3.

She’s been subject to the tapered AA for the previous 3 tax years but not the current. I’ve done a CF calculation to establish what CF she has available and what unused AA for the current year.

My colleague has raised a question which has thrown me and made me question myself.

If she contributes the total amount available, do the CF figures need to be taken into account when calculating adjusted income for the current tax year, because if so, that would mean the AA would be subject to tapering, thus reducing the amount she can contribute.

Or does it not work this way because this is the unused figure that has already been tapered?

Comments

  • GarethMGarethM Member

    If I've understood your question correctly, If it's an employer contribution and threshold income has been calculated to be below £200K, then adjusted income doesn't need to be calculated.

    However, if threshold income is over £200K, then yes, the employer contribution would affect adjusted income for the year.

  • wsj2021wsj2021 Member
    Threshold income is over £200k but adjusted income including contributions she’s made this year are under £240k so no taper applicable for this year.

    Do the CF amounts need to be included under adjusted income as well if she was to contribute these?
  • NathNath Member
    edited April 1

    Yes the Employer contribution does need to be taken into account then e.g if Threshold Income £210K and you have worked out total CF is lets say £100K overall and its all employer contribution then it makes the adjusted income £310K and the taper would apply, so they couldn't contribute the full amount.

    You would need to have a play with the figures, but your colleague is correct.

  • wsj2021wsj2021 Member
    Thanks both
  • benjaminfabibenjaminfabi Moderator
    edited April 1

    You have Threshold Income and Adjusted Income. If they are both exceeded then the AA in the current year is tapered. Previous years' cannot be affected by contributions made this tax year. Only the current year AA can be tapered.

    The only thing that really matters is 'how much can I contribute this year without exceeding my AA, including available carry forward (CF)?'

    If you start from a place where Threshold Income has been exceeded but Adjusted Income hasn't, then you really have three numbers:

    One
    What's the total unadjusted employer pension contribution that they can make? Let's call this 'UAA', which is £40,000, plus available CF from the three previous tax years, less gross contributions already made this tax year.

    Two
    What's the AA excess if they contribute UAA. There are a few steps to this:

    • Revised Adjusted Income, which is the Adjusted Income figure you already had, plus the UAA.
    • Deduct £240,000 from this figure.
    • Reduce the current year AA of £40,000 by half of the difference, to a minimum of £4,000.
    • Work out the difference between UAA and the reduced AA plus available CF. This is the AA excess.

    Three
    What amount can be used in place of the UAA, so that the answer to 2 above is zero?

    You're then left with the scenario of iteratively reducing the UAA to solve 3. The minimum it can be is £4,000 plus available CF.

    The easiest place to start (and usually the correct answer, is):

    Balance of employer contribution required to bring Adjusted Income to £240,000, plus two thirds of the balance of the UAA.

    Benjamin Fabi 
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