Tapering Annual Allowance
arongunningham
Member
I have a case where it's been calculated (via Cashcalc) that for £3,000 salary increase, their pension contribution limit reduces by £1,000. They're a high-earner and between the £150,000 and £210,000 levels.
So it stands to reason that we can say, generally, that 33.33% of one's pay rise is equal to the contribution reduction.
But does anyone know how/why that math works?
It's bugging me!
Comments
The actual figures are:
£4,334.80 - income increase
means that
£1,445 - employer decrease in contributions
Is the individual in question making any personal conts?
it's all employer - hence it increases their Adjusted Income for Tapering.
Someone (a provider) did a table on this.
Similar to this https://www.youinvest.co.uk/sites/default/files/AJBYI_Guide_to_annual_allowance_tapering.pdf
But more in depth.
Cannot remember who at the mo - will keep looking.
Thanks @Jona
On the heading 'maximising pension contributions' you can see for every £10k income increase, the amount you can pay in decreases by 33.33%.
I just wondered how that's the case, mathematically! My stupid brain won't let it lie.
I can't help but think of for every £2, £1 reduction, which isn't 33%
£2+£1 = £3
£1/£3 = 33.33%
EDIT - just to expand on this a bit. The amount of the increased salary and the amount of the reduced contribution have to sum to 100% of what they are. They can't not. The way that the second of those two figures is derived uses a formula where if the increased salary is £2 then the reduced contribution is £1.
Therefore in percentage terms, the reduced contribution is 50% of the increased salary (£1/£2), but 33% of the total of all money in the equation (£1/(£1+£2)).
oh yeah! Thanks @benjaminfabi makes sense now!
actually, no @benjaminfabi it doesn't make sense!
It's not 33% of all the money in the equation, it's 33% of the increase in adjusted income (i.e. salary).
£120,000 salary equals maximum employer contribution of £36,667
£130,000 salary equals maximum employer contribution of £33,333
£10,000 increase equals £3,333 decrease in pension contribution, which is different to £1/£2 and actually 25% of all the money in question.
How does 50% and 25% become 33% ?!
I'd need to see all your inputs into the calculator because that doesn't make much sense
https://www.youinvest.co.uk/sites/default/files/AJBYI_Guide_to_annual_allowance_tapering.pdf
This is what I was referencing in my last message. My real-life calculations resulted in the same determination.
_ it's 33% of the increase in adjusted income _
This is correct. My previous expansion wasn't worded well!!
TAA is a horrible thing!
Here's a full example.
Client has £150,000 adjusted income, with no existing pension contributions and no available carry forward.
Question: What's the maximum pension contribution I can ask my employer to make?
Answer: £26,666
Reason:
£150,000 + £26,666 = £176,666 = £26,666 excess over the TAA adjusted income limit
£26,666 * (1/2) = £13,333 = £13,333 reduction to the AA
£40,000 - £13,333 = £26,666
£13,333 = 1/3 of £40,000
£26,666 = 2/3 of £40,000
Same client gets a £10,000 salaried bonus.
Client now has £160,000 adjusted income, with no existing pension contributions and no available carry forward.
Question: What's the maximum pension contribution I can ask my employer to make?
Answer: £23,333
Reason:
£160,000 + £23,333 = £183,333 = £33,333 excess over the TAA adjusted income limit
£33,333 * (1/2) = £16,667 = £16,667 reduction to the AA
£40,000 - £16,667 = £23,333
Income increase = £10,000
Employer contribution reduction = £26,666 - £23,333 = £3,333
Impact of salary (increased adjusted income) on TAA = £3,333/£10,000 = 33%
The increase in salary is a bit of a red herring though. If you just look at the total input between that 120k to 130k increase its 156,667 to 163,333, which is 6666 difference and therefore a 3333 reduction in the possible contribution.
10000 = 3333+6666 or 1 = 1/3+2/3 and 1/3 is 50% of 2/3, which is perhaps where the 50% becoming 1/3 confusion is coming from?