United Kingdom tapered annual allowance and salary sacrifice
The pension annual allowance taper uses separate threshold-income and adjusted-income tests. Relevant salary sacrifice reductions are added back when threshold income is measured.
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- Threshold income
- No taper where threshold income is £200,000 or less.
- Adjusted income
- Current taper starts above £260,000, subject to the threshold-income test.
- Minimum allowance
- £10,000 under the current taper.
Two income tests
HMRC states that the annual allowance is reduced where adjusted income exceeds £260,000 in the current tax year. It is not reduced if threshold income is £200,000 or less, regardless of adjusted income. HMRC, Tapered annual allowance (opens in a new tab).
For every £2 of adjusted income above £260,000, the current annual allowance reduces by £1. The minimum reduced allowance is £10,000. Earlier tax years up to and including 2022 to 2023 have different limits. HMRC, Tapered annual allowance (opens in a new tab).
Salary sacrifice and threshold income
Threshold income starts with net income for the tax year. Gross pension contributions receiving relief at source are deducted, excluding employer contributions, along with lump sum death benefits received from registered pension schemes. HMRC, Tapered annual allowance (opens in a new tab).
Any reduction of employment income for pension provision through relevant salary sacrifice arrangements made after 8 July 2015 is added back. The same add-back applies to relevant flexible remuneration arrangements made after that date. HMRC, Tapered annual allowance (opens in a new tab).
Adjusted income and pension savings
Adjusted income starts with net income and adds the pension savings and pension tax relief specified by HMRC, including pension savings made by the employer. Lump sum death benefits received from registered pension schemes are deducted. HMRC, Tapered annual allowance (opens in a new tab).
For defined contribution schemes, pension savings are usually contributions made by the member or someone on their behalf during the pension input period, including the employer. Defined benefit savings use the difference between opening and closing benefit values. HMRC, Tapered annual allowance (opens in a new tab).
Exceeding the available allowance
HMRC describes the available allowance as the reduced annual allowance plus unused allowance from the previous 3 tax years. Pension savings exceeding the available allowance are reported on Self Assessment; the excess is added to taxable income and taxed at the applicable Income Tax rate. HMRC, Tapered annual allowance (opens in a new tab).
Scope
This guide provides general information only. It does not assess individual tax liability or pension arrangements and contains no worked example.