Business Owners: Does the Tapered Annual Allowance apply to you?

The Tapered Annual Allowance applies to anyone with a high income and intending to contribute to a pension. It’s particularly relevant for successful entrepreneurs who want to use company pension contributions as part of their tax planning strategy:

Does this Scenario Sound Familiar?

Your business is making some good profits and you’ve got some surplus cash available. You’ve been drawing a basic salary and receiving additional income from dividends. You expect your total income in the current tax year (2023/24) to exceed £200,000. To top it off you intend paying yourself a substantial pension contribution before 5th April 2024.

Let’s talk about the Annual Allowance

You’re likely aware of the standard Annual Allowance, which is the annual maximum individual pension contribution.

For the current tax year this is £60,000. However if your income exceeds £200,000 your Annual Allowance may be reduced or tapered.

It’s a good idea to talk to your Accountant about this. Alternatively, these 3 steps might help if you want to work it out for yourself…

Step 1 – Determine Your Threshold Income

Firstly, calculate your taxable income.

  • Incorporate ALL income sources, inclusive of salary, bonus, and dividends. Don’t overlook any taxable benefits, gross interest, self-employed income, property rental income, and so on.
  • Subtract any tax reliefs available to you from this total. Call this “A”
  • Following that, deduct any personal pension contributions you’ve paid this tax year.

Is the figure £200,000 or more?

If NO, your pension Annual Allowance should remain unaffected this year.

If YES, you should proceed to Step 2, where you’ll calculate your ‘Adjusted Income’…

Step 2 – Identify Your Adjusted Income

Starting with the total you calculated for A in Step 1 above (i.e. but 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 Grand Total more than £260,000?

If NO, your Annual Allowance will remain unaffected this year.

If YES, your Annual Allowance will undergo tapering…

Step 3 – Tapered Annual Allowance

For every £2 of adjusted income exceeding £260,000, your Annual Allowance for that year reduces by £1.

For instance, if your adjusted income hits £280,000, the Annual Allowance would reduce by £10,000 to £50,000 (as opposed to the standard Annual Allowance of £60,000).

(They calculate this as: £280,000 – £260,000 = £20,000/2 = £10,000 reduction)

The lowest possible Annual Allowance from tapering is £10,000 – this will apply if your adjusted income meets or exceeds £360,000.

What happens if You Exceed your Tapered Annual Allowance?

The amount paid over your Tapered Annual Allowance is declared on your tax return and will be added to your income and subject to income tax at your highest marginal rate.

You can either pay it via self assessment or, depending on your Pension Provider,you might have the option of using ‘Scheme Pays’ to pay it from your pension fund.

Note that there is a formal process to go through with Scheme Pays and deadlines to meet, so speak to your provider first.


The following table is based on the 2023/24 tax year and a standard Annual Allowance of £60,000. It assumes the company contribution is £60,000 and that all carry forward has been used. It’s only a simple guide – do check your personal circumstances with your Accountant.

Threshold Income – Step 1

Adjusted Income – Step 2 AI Amount Over £260K Reduced Annual Allowance

Added to your Taxable Income


£270,000 £10,000 £55,000



£280,000 £20,000 £50,000



£290,000 £30,000 £45,000 £15,000
£240,000 £300,000 £40,000 £40,000



£310,000 £50,000 £35,000 £25,000


£320,000 £60,000 £30,000 £30,000
£270,000 £330,000 £70,000 £25,000



£340,000 £80,000 £20,000 £40,000
£290,000 £350,000 £90,000 £15,000


£300,000 + £360,000 £100,000 £10,000


If you’re a Member of a Defined Benefit Pension Scheme

Things aren’t quite as simple and fall beyond the scope of this post. For more detailed guidance, the government website is a solid starting point

More Reading

What is Carry Forward?

Company Pension Contributions: Tax Savings for Business Owners

Dividends and Pensions: An Easy Guide for Business Owners

Photo Credit: Alexandria Bates

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Risk Warnings

This article and the information on this website is not personal advice. It’s only intended to give you a brief summary or highlight a particular issue for you to investigate further. It is based on our current understanding of legislation and HMRC guidance which can change and is correct as of the date of the post.

If you’re in any doubt whether a particular course of action is suitable for your circumstances, you should seek professional advice. Tax rules can change and any benefits depend on individual circumstances. And, if you are unsure any reliefs are applicable to you, you should consult your accountant or HMRC.

The value of investments and any income from them can fall as well as rise, so you could get back less that you put in. Past performance is not a guide to the future. It cannot provide a guarantee of the future returns of a fund.

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