Retirement planning is a necessary evil for most of us, at least it is if we want to stop working at some point in the future.

The introduction of Pension Freedoms in 2015 has undoubtedly given pensions a new lease of life. But whilst the way we withdraw money has been reinvigorated, for some people the amount they can pay in has been cut dramatically; by up to 75% in some cases.

That’s a massive reduction, which will hit the very people doing the responsible thing and putting money aside for their retirement, the hardest.

The trap is laid

Simply speaking, the maximum most people can pay into their pension, and receive tax-relief, is an amount equal to 100% of their earnings, capped at £40,000.

We say “most people”, because for those people earning over £110,000 per year a cap, known as the Annual Allowance, might actually be much lower.

Here’s how it works; it’s complicated, so we’ll take our explanation in small steps because it’s important you understand this. Not doing so could be very costly; we’ll explain more about that at the end of this article.

Of course, if you want to opt out right now and simply pick the phone up to us, we’ll explain it to you that way.

How it works – the theory

Legislation changed from 6th April 2016 and could mean very high earners only being able to pay £10,000 per year in to their pension (including tax-relief)

If your income exceeds £110,000 you may be classed as a ‘high earner’ which could mean your Annual Allowance is reduced, known as ‘tapering’, down to £10,000

The definition of income needs exploring further though as two different definitions have been introduced for the purposes of calculating allowable pension contributions:

Adjusted income:

This is calculated as follows:

Total income before tax from all sources + Pension contributions made by your employer + Pension contributions made under a ‘net pay’ arrangement

Threshold income:

This is calculated as follows:

Total income before tax from all sources + Any amount of employment income given up for pension provision via a salary sacrifice arrangement (started on or after 9 July 2015) The gross amount of any personal contributions paid into a pension scheme

Where to start?

  1. Calculate your Threshold income. If it is £110,000 or less, you will not be affected by a tapered Annual Allowance and will still be able to pay up to £40,000 in to your pension
  2. If your Threshold income is above £110,000 you will then need to calculate your Adjusted income
  3. If Adjusted Income is greater than £150,000 in a single tax-year, your Annual Allowance will be reduced by £1 for every £2 over £150,000. So, for example, if your Adjusted income is £160,000, your Annual Allowance will be reduced by £5,000, to £35,000

The table below shows some other examples:

Adjusted income Annual Allowance available
£150,000 £40,000
£160,000 £35,000
£170,000 £30,000
£190,000 £20,000
£210,000 and over £10,000

How it works – some practical examples

Example 1: James has total income of £140,000 and his employer pays £50,000 into his SIPP.

Therefore, his Adjusted income is £190,000 and, consequently, his Annual Allowance will reduce to £20,000.

As the contribution paid by his employer exceeds the tapered Annual Allowance by £30,000 James can expect an additional tax bill, to be paid personally.

Example 2: Hannah earns £120,000 with extra income, from a Buy to Let property, of £4,000 a year. Her employer makes a 15% contribution into a SIPP (Self-Invested Personal Pension), which Hannah matches.  The total pension contribution is therefore £36,000.

Hannah’s Adjusted income for the year is therefore £160,000 (£120,000 + £36,000 + £4,000); on the face of it, she may therefore be affected by the new rules.

However, the good news for Hannah is that her Threshold income is actually only £102,000. This is calculated by taking her income (£120,000) and deducting her own pension contribution (£18,000).

Hannah will therefore not be affected by the new rules.

These examples are just that, and designed to show how the new rules may work in real life. However, everyone’s circumstances are unique to them. The best way to discover if you will be affected is to get in touch with us, explain your circumstances and we’ll tell you whether or not the new rules will cut the amount you can pay into your pension.

How can you avoid the trap?

As you can probably tell by now, the new rules are extremely complex.

If you are a higher earner, it’s vital you take steps to understand whether the new rules will affect you. If they catch you it could mean:

  • The amount you can pay into your pension is restricted, consequently the amount of tax-relief you can claim will be reduced
  • You have less income in retirement as a result of making reduced pension contributions
  • You are left with an unexpected tax bill, as any excess pension contributions above the tapered Annual Allowance will be taxed at your marginal rate of 40% or 45%

What now?

First things first, you need to find out if you are affected by the new rules. Then, if you are develop a strategy to deal with them which will keep your retirement planning on track, without landing you with an unexpected tax bill.

As experts in retirement planning, we can help with both.

If you need answers we are here to help:  please speak to your usual consultant, call us on 0116 240 7070 or email

The content of this article is based on our understanding of the current Tapering rules (January 2018), which is subject to change. Any information given should not be construed as Financial Advice or specific guidance. If you require specific advice relating to your personal circumstances please contact us.