HIGHER EARNER

Jo is one of your organisation’s higher earners. They’ve been enrolled in the company’s defined contribution pension scheme since they joined the organisation five years ago, but they've recently received a large pay increase.

HIGHER EARNER

Jo is one of your organisation’s higher earners. They’ve been enrolled in the company’s defined contribution pension scheme since they joined the organisation five years ago, but has recently received a large pay increase.

Jo’s worried that their increased salary will cause them to exceed their pension annual allowance. Jo has come to you for guidance on what they need to consider.

Annual Allowance


The annual allowance is the maximum total contribution an individual can receive into their pensions in one tax year, without incurring a tax charge. For the current tax year, the annual allowance for most people is £60,000. For more information, download our factsheet here. Tapered Annual Allowance


Put simply, the annual allowance is reduced for most people with adjusted income above £240,000 a year AND a threshold income of more than £200,000. For more detailed information on how to calculate the Tapered Annual Allowance, please see our factsheet here.

What does Jo need to consider

If Jo’s total salary is over £200,000, they need to determine whether they would be affected by the Tapered Annual Allowance. Jo’s ‘threshold income’ and ‘adjusted income’ need to be calculated in order to assess whether their pension allowance would be tapered.

What do you need to know?

High earners can have complicated financial affairs. As a HR professional, thankfully it’s not down to you to navigate complex tax rules, but it is important for you to understand your employee’s needs so you can steer them to an expert. Given the complexity of these rules, you may wish to fund the cost of financial advice for certain employees, or consider offering alternative savings outside of pensions, such as ISAs or general investment accounts.

Threshold income


Threshold income is an employee’s total taxable income plus any salary/bonus sacrificed for pension contributions, minus any personal pension contributions. Adjusted income


Adjusted income is an employee’s total taxable income after any reliefs, plus any employer pension contributions.

Guidance


Remember, the Tapered Annual Allowance is not just about any employees affected now, but also those who may be affected in the future due to pay rises, bonuses etc. For more in-depth information on the Tapered Annual Allowance, see our factsheet here.

Video Summary


Want to know more about pensions? Get in touch

Please provide an email address for further information.

Continue to Lee ­­ – Approaching Retirement