Tapered Annual Allowance Timebomb?

The tapered annual allowance is designed to reduce the amount that can be paid into a pension in a given year and receive tax relief.

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Anne McClean
Published: 09 Jul 2021 Updated: 13 Apr 2023

The tapered annual allowance was first introduced 6 April 2016 and is designed to reduce the amount that can be paid into a pension in a given year and receive tax relief. This had a particular impact on those working in the NHS and led to calls to #scrapthetaper.

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In an attempt to remedy the situation the Government changed the thresholds in the 2020/21 tax year. For those with earnings above £240,000, the normal annual allowance of £40,000 is reduced, until at £314,000 the maximum that can be paid into pensions is £4,000. Beware however as the threshold for those who are tested actually starts at £200,000.

This limit applies to employer and employee contributions to pensions.

How people might be affected is demonstrated by the following case studies.

Example 1

Phillip earns £350,000 per annum. He started his current role in 2020/21 tax year. On joining he became a member of a group personal pension scheme and benefits from employee and employer contributions. This is based on his basic salary as opposed to his overall package.

Prior to joining, Philip was working as a consultant and had his own limited company. He made contributions to a Scottish Widows pension on an ad hoc basis. He kept his earnings low.

The table below details Phillips income per tax year, pension contributions and annual allowance for the 2021/22 tax year and proceeding four tax years.

Tax YearIncomeScottish Widows Pension ContributionGPP Employer ContributionGPP Employee ContributionTotal ContributionsPhillips Annual AllowanceOver/Under AA
Estimated 21/22£350,000£23,500£11,750£35,250£4,000£31,250

As Phillip is earning above £200,000, he is caught by tapered annual allowance. As he is earning over £312,000, the maximum pension contribution he can make is £4,000 per year. This includes employer contributions.

In the 2020/21 tax year the contributions made to his new group personal pension are £27,435 over his allowance for this year. There is no tax charge as he is able to carry forward his unused allowance of £30,000 from the 2017/18 tax year. For 2021/22 he can carry forward his unused allowance from 2018/19, and potentially make a small personal contribution so as not to lose the remaining £5,750. In 2022/23 he will be covered by carry forward from 2019/20.

From 2023/24 he will have no more carry forward allowance to utilise. His employer may offer an alternative to pension contributions which might be more attractive than staying in the scheme.

Example 2

Margaret runs her own business and in the current 2021/22 tax year, her overall income will be £350,000. As a result, her annual allowance for pension contributions has fully tapered down to £4,000.

The table below highlights her historical income and pension contributions:

Tax YearIncomeContributionAnnual AllowanceCarry forward availability

Although Margaret’s annual allowance for 2021/22 is only £4,000 and she was impacted by the tapered annual allowance in 2019/20 (when her earnings were £30,000 above the threshold resulting in her annual allowance tapering to £25,000), she is still able to contribute up to £81,000 in the current tax year.

If Margaret didn’t have the cashflow to make such a contribution, she would be encouraged to contribute at least £40,000 in order to make use of her tapered annual allowance for 2021/22 and utilise her £36,000 annual allowance from 2018/19 before it drops off at the start of the 2022/23 tax year.

The carry forward availably from 2019/20 and 2020/21 can still be used next tax year (into the 2023/24 tax year as far as 2020/21 is concerned).


Our view is that there are number of high earning employees who are unaware they are affected by these rules and potentially have tax liabilities they are unaware of. In an environment where the Treasury will be looking to increase receipts it is important for individuals to take stock of their position.

Listen to our podcast: Tapered annual allowance

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.

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This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.