How does the tapered pension annual allowance work for high earners?

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The tapered annual allowance targets very high earners, gradually restricting the tax-relieved pension contributions they can make each year, on top of the standard £60,000 annual allowance that applies to everyone else. **Who is affected** Tapering only applies to people with 'adjusted income' above £260,000 for the tax year, AND 'threshold income' above £200,000 -- both tests must be met; someone with high adjusted income but threshold income below £200,000 (for example, due to large pension contributions reducing threshold income) is not affected by the taper. **How the reduction works** For every £2 of adjusted income above £260,000, the annual allowance reduces by £1, down to a minimum (floor) allowance of £10,000, which is reached once adjusted income reaches £360,000. **Worked example** Someone with adjusted income of £300,000 (and threshold income above £200,000) is £40,000 over the £260,000 threshold. Their annual allowance reduces by £40,000 ÷ 2 = £20,000, from £60,000 down to £40,000 for that tax year. Someone with adjusted income of £400,000 has already exceeded the point where the floor applies, so their annual allowance is capped at the £10,000 minimum, regardless of how much further above £360,000 their income is. **Adjusted income versus threshold income** Adjusted income broadly means total taxable income plus employer pension contributions (and some other additions). Threshold income is broadly total taxable income minus personal pension contributions made via relief at source, which is why increasing personal pension contributions can sometimes, counter-intuitively, bring someone's threshold income back under £200,000 and avoid tapering altogether, even though it looks like more is going into the pension. **Consequences of exceeding your tapered allowance** Contributions (from you and your employer combined) above your specific tapered annual allowance trigger an annual allowance tax charge, effectively clawing back the tax relief on the excess at your marginal rate. **Practical tip** High earners close to or above £200,000 threshold income should get a specific calculation of both threshold and adjusted income each year before deciding pension contribution levels, since the interaction between salary, bonuses, benefits, and employer contributions can be complex and the tax charge for overcontributing can be significant.

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