The passing of deadline for submitting the 2021/22 tax return has come, but there are significant financial and tax questions to be considered. Here’s some of the most frequent topics we get from high earners.
Explain how to calculate my Tapered Annual Allowance – threshold and adjusted income UK pensions
The Tapered Annual Allowance is a reduction in the amount of pension contributions that can be made tax-free in a given tax year for high-earning individuals in the UK. The amount of the reduction depends on the individual’s “threshold income” and “adjusted income.”
Threshold Income: The threshold income is the same as the figure used to determine if extra National Insurance Contributions (NICs) are payable. For the tax year 2022-2023, the threshold income is £9,568.
Adjusted Income: Adjusted income is calculated as the sum of your taxable income, taxable pensions and any taxable benefits, excluding personal pension contributions. If your adjusted income is above £240,000 in a given tax year, your Tapered Annual Allowance will be reduced.
To calculate your Tapered Annual Allowance:
- Determine your threshold income and adjusted income for the tax year.
- Calculate the reduction factor:
- If your adjusted income is between £240,000 and £300,000, the reduction factor is £1 for every £2 of adjusted income above £240,000.
- If your adjusted income is above £300,000, the reduction factor is £1 for every £1 of adjusted income above £300,000.
- Calculate the Tapered Annual Allowance:
- Subtract the reduction factor from the standard Annual Allowance of £40,000.
- The Tapered Annual Allowance cannot be less than £4,000.
It is important to note that these calculations may change from year to year depending on changes to the tax laws. It is always a good idea to check the current rules for the current tax year.
Can I use past pension allowance to make a contribution today?
Yes, use pension carry forward. Pension carry forward is a rule that allows individuals in the UK to make contributions to their pension plan beyond the annual contribution limit (also known as the Annual Allowance) in certain circumstances. The idea behind carry forward is to allow individuals to make up for any unused contribution room from previous years.
Here’s how pension carry forward works:
- Determine the Annual Allowance for the current tax year.
- Calculate your pension contributions for the current tax year and any previous three tax years.
- Subtract the total contributions for the current tax year and the previous three tax years from the Annual Allowance for the current tax year.
- The remaining amount is your available carry forward allowance, which you can use to make additional pension contributions in the current tax year.
It is important to note that pension carry forward is a complex rule and there may be additional restrictions and considerations, such as the Tapered Annual Allowance for high-earning individuals. It is always a good idea to consult a financial advisor or a pensions expert for specific advice on your situation.
Financial planning questions high earners in the UK should be asking themselves
High earners in the UK may face a number of financial planning challenges, including managing their income, maximising their savings and investments, and planning for retirement. Here are some questions that high earners should be asking themselves as part of their financial planning process:
- Am I maximising my tax efficiency? High earners may need to consider tax-efficient strategies to minimize the impact of their income on their tax bill, such as using a pension plan or ISA.
- Am I saving enough for retirement? High earners should consider the amount they need to save each month to reach their retirement goals, as well as the type of pension plan that would be most suitable for their needs.
- How will I manage my investment portfolio? High earners should consider the right mix of investments to help them achieve their financial goals, as well as the risks associated with each type of investment.
- How will I manage any debt I have? High earners should consider the best strategies for managing any debt they have, such as paying off high-interest credit card debt or taking out a loan with a lower interest rate.
- How will I plan for unexpected events, such as illness or unemployment? High earners should consider taking out insurance policies to help protect themselves and their families in case of unexpected events.
- How will I pass on my wealth to future generations? High earners should consider the best strategies for passing on their wealth to their children or other beneficiaries, such as writing a will or setting up a trust.
It is always a good idea to seek advice from a financial advisor or a pensions expert to help you with your financial planning and make sure that you are making the most of your income and wealth.