It is easier to calculate the threshold income first as it is less complicated. Beware an adjusted income quirk. If an employer contribution is made having calculated your available tapered allowance, then it increases your adjusted income, which changes the amount of your tapered allowance.
Can you carry forward?
Yes. Any unused annual allowance from the previous three years can be carried forward and added to the tapered amount to give an overall annual allowance for the tax year.
For any year in which an individual breached both income limits the amount of annual allowance that can be carried forward from that year is the amount of unused tapered annual allowance. Given the tapered amount will vary, due to the link to taxable income which will normally vary, the calculations will be more onerous and good record keeping essential.
Can you make the scheme pay the charge?
Sometimes, but the detail is different from the norm. Schemes can voluntarily pay the charge. If requested by the member in the right format, a scheme is required to pay some or all of an annual allowance charge from the pension fund (DC), or by reducing the benefits (DB), under ‘mandatory scheme pays’, where the:
• Liability for the tax year exceeds £2,000 and;
• Pension input amount for the pension scheme for the same tax year has exceeded the standard annual allowance amount of £40,000 – meaning the tapered and/or money purchase annual allowances are ignored.
The quirk for the tapered annual allowance is that, while the tax charge is based on the tapered amount, the scheme can only be required to pay that amount of the charge that is derived by inputs over the standard annual allowance. For example, an additional rate taxpayer has a £10,000 tapered annual allowance and pays in £42,000. The tax charge with reference to the tapered allowance is £32,000 x 45 per cent = £14,400, but the amount with reference to the standard annual allowance is £2,000 x 45 per cent = £900.
Can the MPAA apply too?
Individuals are subject to the money purchase annual allowance rules where they have flexibly accessed their pension benefits and have money purchase contributions in excess of £4,000.
Under the normal rules when this applies the annual allowance available for all the other benefits in the year, that is, defined benefits and any money purchase contributions made prior to benefits being flexibly accessed, is reduced by £4,000.
