Reduction in annual pension allowance
From 6 April 2016 there is a phased reduction in the annual allowance that can be contributed to a pension scheme. The excess becomes an unrelieved pension contribution. Two definitions are important – threshold income and adjusted income. The restriction will apply where the threshold income exceeds £110,000 and the adjusted income exceeds £150,000. An example shows this best.
Say you have total income of £150,000 including salary of £140,000. And your employer makes a contribution of £30,000. If you make a contribution, grossed up of £40,500 the change will not affect you since £150,000 – £40,500 = £109,500. However if you make a contribution, grossed up of £39,500, it will. £150,000 less £39,500 is £110,500 so caught under first test. £110,500 + £39,500 + £30,000 = £180,000. Excess is £30,000 so allowance reduced by 50% or £15,000 from £40,000 to £25,000. Reduced to a maximum of £10,000 if adjusted income exceeds £210,000.