Tapering Annual Allowance

I have a case where it's been calculated (via Cashcalc) that for £3,000 salary increase, their pension contribution limit reduces by £1,000. They're a high-earner and between the £150,000 and £210,000 levels.

So it stands to reason that we can say, generally, that 33.33% of one's pay rise is equal to the contribution reduction.

But does anyone know how/why that math works?

It's bugging me!

Comments

  • The actual figures are:

    £4,334.80 - income increase

    means that

    £1,445 - employer decrease in contributions

  • Is the individual in question making any personal conts?

  • Because the employer contribution also tapers the AA
    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • it's all employer - hence it increases their Adjusted Income for Tapering.

  • JonaJona Member

    Someone (a provider) did a table on this.
    Similar to this https://www.youinvest.co.uk/sites/default/files/AJBYI_Guide_to_annual_allowance_tapering.pdf

    But more in depth.
    Cannot remember who at the mo - will keep looking.

  • Thanks @Jona

    On the heading 'maximising pension contributions' you can see for every £10k income increase, the amount you can pay in decreases by 33.33%.

    I just wondered how that's the case, mathematically! My stupid brain won't let it lie.

    I can't help but think of for every £2, £1 reduction, which isn't 33%

  • benjaminfabibenjaminfabi Moderator
    edited December 5

    £2+£1 = £3
    £1/£3 = 33.33%

    EDIT - just to expand on this a bit. The amount of the increased salary and the amount of the reduced contribution have to sum to 100% of what they are. They can't not. The way that the second of those two figures is derived uses a formula where if the increased salary is £2 then the reduced contribution is £1.

    Therefore in percentage terms, the reduced contribution is 50% of the increased salary (£1/£2), but 33% of the total of all money in the equation (£1/(£1+£2)).

    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • oh yeah! Thanks @benjaminfabi makes sense now!

  • actually, no @benjaminfabi it doesn't make sense!

    It's not 33% of all the money in the equation, it's 33% of the increase in adjusted income (i.e. salary).

    £120,000 salary equals maximum employer contribution of £36,667
    £130,000 salary equals maximum employer contribution of £33,333

    £10,000 increase equals £3,333 decrease in pension contribution, which is different to £1/£2 and actually 25% of all the money in question.

    How does 50% and 25% become 33% ?!

  • I'd need to see all your inputs into the calculator because that doesn't make much sense

  • https://www.youinvest.co.uk/sites/default/files/AJBYI_Guide_to_annual_allowance_tapering.pdf

    This is what I was referencing in my last message. My real-life calculations resulted in the same determination.

  • _ it's 33% of the increase in adjusted income _

    This is correct. My previous expansion wasn't worded well!!

    TAA is a horrible thing!

    Here's a full example.

    Client has £150,000 adjusted income, with no existing pension contributions and no available carry forward.

    Question: What's the maximum pension contribution I can ask my employer to make?
    Answer: £26,666

    Reason:
    £150,000 + £26,666 = £176,666 = £26,666 excess over the TAA adjusted income limit
    £26,666 * (1/2) = £13,333 = £13,333 reduction to the AA
    £40,000 - £13,333 = £26,666

    £13,333 = 1/3 of £40,000
    £26,666 = 2/3 of £40,000

    Same client gets a £10,000 salaried bonus.

    Client now has £160,000 adjusted income, with no existing pension contributions and no available carry forward.

    Question: What's the maximum pension contribution I can ask my employer to make?
    Answer: £23,333

    Reason:
    £160,000 + £23,333 = £183,333 = £33,333 excess over the TAA adjusted income limit
    £33,333 * (1/2) = £16,667 = £16,667 reduction to the AA
    £40,000 - £16,667 = £23,333

    Income increase = £10,000
    Employer contribution reduction = £26,666 - £23,333 = £3,333
    Impact of salary (increased adjusted income) on TAA = £3,333/£10,000 = 33%

    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • StuartBFMStuartBFM Member
    edited December 6

    The increase in salary is a bit of a red herring though. If you just look at the total input between that 120k to 130k increase its 156,667 to 163,333, which is 6666 difference and therefore a 3333 reduction in the possible contribution.

    10000 = 3333+6666 or 1 = 1/3+2/3 and 1/3 is 50% of 2/3, which is perhaps where the 50% becoming 1/3 confusion is coming from?

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