Tapering Annual Allowance

Member

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!

• Member

The actual figures are:

£4,334.80 - income increase

means that

£1,445 - employer decrease in contributions

• Member

Is the individual in question making any personal conts?

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

• Member

it's all employer - hence it increases their Adjusted Income for Tapering.

• 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.

• Member

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%

• Moderator
edited December 2018

£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

• Member

oh yeah! Thanks @benjaminfabi makes sense now!

• Member

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% ?!

• Member

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

• Member

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.

• Moderator

_ 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?

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?

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