Does this sound familiar?
- Your business is making some good profits and you’ve got some surplus cash available.
- You’re taking a basic salary and topping up your income with dividends.
- Your income is likely to be over £200K in this tax year (2020/21).
- You want to pay yourself a company pension contribution before 5th April 2021.
As you may know, there is a standard Annual Allowance, which is the maximum pension contribution per person, per year.
For the current tax year this is £40,000. However, if you are on a high income your Annual Allowance may be reduced or tapered. You can ask your accountant to check this for you.
Or, follow these 3 steps if you want to get an idea of it for yourself…
Step 1 – Work Out Your Threshold Income
START by working out your taxable income.
This is ALL your sources of income including salary, bonus and dividends. Don’t forget to add in any taxable benefits, gross interest, self-employed income, property rental income etc.
DEDUCT any tax reliefs that are available to you. Let’s call this total – A
NEXT From the total in A above DEDUCT any personal pension contributions you’ve already paid this tax year.
Is this £200,000 or more?
If NO, your pension Annual Allowance will not be reduced this year. You can stop reading.
If YES, you need to keep reading go to Step 2 to calculate your ‘Adjusted Income’…
Step 2 – What’s Your Adjusted Income?
Starting with the total you calculated for A in Step 1 above (i.e. Don’t add the personal pension contributions). This time add:
- any employer (company) pension contributions for the year, including by salary sacrifice.
- certain personal pension contributions that you have paid gross
- this is only likely if you have a very old pension plan or an established company pension scheme.
Is the Total over £240,000?
If NO, your Annual Allowance will not be reduced this year.
If YES, your Annual Allowance will be tapered…
Step 3 – Tapered Annual Allowance
The way that tapering works is that for every £2 of adjusted income that exceeds £240,000, your Annual Allowance for that year drops by £1.
For example, if your adjusted income is £260,000 the Annual Allowance would be reduced by £10,000 to £30,000. (Rather than the standard Annual Allowance of £40,000).[this is calculated as: £260,000 – £240,000 = £20,000/2 = £10,000 reduction]
The minimum Annual Allowance from tapering is £4,000 – this will apply if your adjusted income is £312,000 and above.
If you’re a Member of a Defined Benefit Pension Scheme
It’s not so straightforward and outside the scope of this post. A good place to start is the government website which provides more detailed guidance.