Annual allowance examples
Annual allowance example 1 – Sanjay
This example shows Sanjay’s annual allowance position for the 2019/2020 year. This example demonstrates the lower annual allowance tapering limits that were in force before the 2020/21 year.
| Sanjay’s financial information | Amount |
|---|---|
| Gross salary 2019/20 | £130,000 |
| Less employee pension contributions (10.2%) | £13,260 |
| Plus taxable income from property | £30,000 |
| Threshold income 2019/20 | £146,740 |
| Plus pension savings in the year | £42,449 |
| Adjusted income 2019/20 | £189,189 |
Sanjay’s Threshold income is more than £110,000 and his Adjusted income is more than £150,000. His annual allowance is tapered for the 2019/20 year
| Sanjay’s financial information | Amount |
|---|---|
| Tapered annual allowance | £20,406* |
| In excess of annual allowance | £22,043 (£42,449 – £20,406) |
| Annual allowance tax charge at marginal rate | £8,817.20 (40% rate assumed) |
* Taper = £189,189 – £150,000 = £39,189 ÷ 2 = £19,594 (rounded down)
Standard annual allowance £40,000 – £19,594 = tapered annual allowance £20,406
Annual allowance example 2 – Cerys
Cerys is a higher earner who exceeds the standard annual allowance in the 2020/21 year.
| Cerys’s financial information | Amount |
|---|---|
| Gross salary 2020/21 | £220,000 |
| Less employee pension contributions (10.9%) | £23,980 |
| Threshold income 2020/21 | £196,020 |
Cerys’s Threshold income is less than £200,000. Her annual allowance will not be tapered in 2020/21. Cerys’s pension savings will be measured against the standard annual allowance of £40,000.
| Cerys’s financial information | Amount |
|---|---|
| Pension savings in 2020/21 | £71,837 |
| Standard annual allowance | £40,000 |
| Pension savings in excess of annual allowance | £31,837 |
| Annual allowance tax charge at marginal rate | £14,327 (45% rate assumed) |
Annual allowance example 3 – Huang
In this example, Huang exceeds the increased tapered annual allowance limits that applied in the 2020/21 year.
| Huang’s financial information | Amount |
|---|---|
| Gross salary 2020/21 | £210,000 |
| Less employee pension contributions (10.9%) | £22,890 |
| Plus taxable income from property | £30,000 |
| Threshold income 2020/21 | £217,110 |
| Plus pension savings in the year | £68,571 |
| Adjusted income 2020/21 | £285,681 |
Huang’s Threshold income is more than £200,000 and her Adjusted income is more than £240,000. Her annual allowance will be tapered for the 2020/21 year.
| Huang’s financial information | Amount |
|---|---|
| Tapered annual allowance | £17,160* |
| In excess of annual allowance | £51,411 |
| AA tax charge at marginal rate | £23,134 (45% rate assumed) |
* Taper = £285,681 – £240,000 = £45,681 ÷ 2 = £22,840 (rounded down)
Standard annual allowance £40,000 – £22,840 = £17,160.
Annual allowance examples – assumptions
We have made no allowance for any carry forward in these examples. In working out the pension savings in the year we have assumed:
- inflation adjustment of zero
- the members have no final salary benefits in the LGPS, and
- the members are not paying any additional contributions.