For most taxpayers the annual tax-free pensions allowance is £40,000. In 2016 the tapered allowance regulation was introduced, lowering this amount for high earners.
This regulation applies to individuals with a threshold income over £110,000 and adjusted income over £150,000. Threshold income is the individual’s net income for the year plus:
Adjusted income is calculated using the threshold income plus the total pension input amount. If the adjusted income is over £150,000 you must calculate how much more your adjusted amount is than the threshold.
In short, you could face tax penalties if you meet the income thresholds and pay over £10,000 into your pension. The taper works by reducing the allowance exceeding £150,000 down to £1 for every £2.
For example, if you earn £28,556 over the adjusted income you will divide this amount by 2 and deduct it from the usual £40,000 tax-free allowance. So, the calculation would be:
40,000 – (28,556 ÷ 2) = £25,722. Meaning pension contributions over this amount will be taxed.
If your pension savings are more than the annual allowance for the year you should utilise the ‘brought forward relief’.