Year End Tax Planning 2021/22

As a new tax year approaches, it is important to ensure you are in the best financial position to help protect and grow your future wealth.

Our Bitesize Tax Planning provides you with details of the key allowances and reliefs available to you. The tax planning tips are available in easy to consider sections.

This article looks at Tapered Annual Allowance.

Pension Annual Allowance Alternative

Not everyone will have the full Pension Annual Allowance of £40,000 available to them. High earners may have a reduced allowance due to ‘tapering’. For high earners, tapering starts if your adjusted income exceeds £240,000 and your threshold income exceeds £200,000. This is the case for both this year and last.

Calculating threshold and adjusted income can be quite complicated so a regulated financial or tax advice may be required. To work out if you have a reduced (tapered) annual allowance for a tax year, you’ll need to work out your:

  • Net income in that tax year
  • Pension savings in that tax year
  • Threshold income in that tax year
  • Adjusted income in that tax year

For every £2 your adjusted income goes over £240,000, your annual allowance for the current tax year reduces by £1. For example, if your adjusted income was £280,000 your annual allowance would be reduced to £20,000.

This ‘tapering’ stops at £312,000, so everyone will retain an allowance of at least £4,000.

If you’re affected by the taper and the contributions to your pensions exceed your reduced annual allowance, first check if you may be able to use carry forward to reduce or remove any excess. This could potentially restore you to the normal annual allowance for that tax year.

Carrying Forward

Carry forward relates to unused annual allowance from the three previous tax years. To be able to use it you must have been a member of a registered pension scheme in each of the tax years from which you wish to carry forward from. Any unused annual allowance must be used from the earliest year first. If you are subject to a tapered annual allowance, you need to measure any unused annual allowance against the tapered allowance for each given year.

If there’s still an excess amount after carrying forward, you will face a tax charge on this amount. The amount will be added to your income and will be subject to Income Tax at your highest marginal rate.

For more information on how to work out your reduced annual allowance visit: gov.uk or speak to your adviser if you think you might be getting close to your annual allowance.

See the other topics in our Bitesize Tax Planning series:

Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.

The financial conduct authority does not regulate tax advice, estate planning or will writing.

The content in this article is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.

Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.

Pareto Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.