Tapered annual allowance calculations can produce unexpected results because threshold income and adjusted income are not two descriptions of the same figure. They are separate statutory calculations designed to test whether a high-income individual should have the standard pension annual allowance reduced. An individual can therefore have threshold income below one figure but adjusted income substantially above it, particularly where an employer makes significant pension contributions.
For 2026/27, the standard annual allowance is £60,000. Tapering can apply where threshold income exceeds £200,000 and adjusted income exceeds £260,000. When both conditions are satisfied, the annual allowance is reduced by £1 for every £2 of adjusted income above £260,000, subject to a minimum annual allowance of £10,000.
How tapered annual allowance calculations use two income tests
Threshold income is considered first. Broadly, the calculation begins with net income before Personal Allowances, then makes specific adjustments. Gross personal pension contributions made under relief at source are deducted, while employment income given up under certain post-8 July 2015 salary sacrifice or flexible remuneration arrangements is added back.
The detailed threshold and adjusted income rules reflect an anti-avoidance purpose as well as ordinary pension tax mechanics. If threshold income is not more than £200,000, tapering does not apply even where employer pension contributions would otherwise push adjusted income above £260,000.
Adjusted income works differently. It effectively brings pension saving back into the calculation. Contributions made through net pay arrangements are added back because they have already reduced taxable employment income, and the calculation also incorporates pension input amounts attributable to employer funding.
This is why a senior employee with salary and investment income of £195,000 can potentially remain outside the taper despite a substantial employer pension contribution, while someone with net income of £215,000 and the same contribution may be brought firmly within it.
Tapered annual allowance calculations where employer contributions are significant
Consider an individual with net income of £230,000 and employer pension contributions of £60,000. Assume there are no other adjustments.
Threshold income is broadly £230,000, so the first test is exceeded. Adjusted income is broadly £290,000 because the pension input attributable to employer funding is brought into the calculation.
Adjusted income exceeds £260,000 by £30,000. The annual allowance is therefore reduced by £15,000, leaving a tapered annual allowance of £45,000 before any available carry forward is considered.
The £60,000 pension input exceeds that year’s tapered allowance by £15,000, although unused annual allowance from the previous three tax years may reduce or eliminate an annual allowance charge.
A different result can arise where the individual personally contributes to a relief-at-source pension. A qualifying gross personal contribution can reduce threshold income. If threshold income is brought to £200,000 or below, the taper does not apply even where adjusted income remains above £260,000.
That interaction should be calculated rather than approximated because different pension contribution methods affect the two tests differently.
Salary sacrifice needs careful treatment
Salary sacrifice cannot automatically be used to sidestep the taper. Relevant arrangements entered into after 8 July 2015 can require the sacrificed remuneration to be added back when threshold income is calculated.
The legislation also contains wider anti-avoidance provisions aimed at arrangements whose main purpose includes manipulating threshold or adjusted income between tax years to reduce the taper.
The current pension annual allowance rates and thresholds should therefore be applied to the actual remuneration and pension arrangements rather than simply using taxable salary from a P60.
Defined benefit schemes can create less visible pension input
For members of defined benefit schemes, pension input is not simply the employee contribution appearing on the payslip. Broadly, the increase in the value of the promised pension over the pension input period is measured under statutory rules.
This can cause adjusted income and the annual allowance calculation to produce unexpected results for senior NHS professionals, academics and executives with defined benefit membership, particularly following significant salary increases or promotion.
A complete calculation should therefore establish income, personal contributions, employer or deemed pension input and any available unused allowance.
Where the taper produces a charge, the position normally needs to be reflected correctly within the individual’s Self Assessment tax return. Where remuneration includes bonuses, employer pension contributions, defined benefit accrual or salary sacrifice, specialist tax advice should model both income tests before additional pension funding is committed.
Disclaimer: This article is provided for general guidance only and does not constitute personal tax, legal or financial advice. The correct tax treatment depends on the specific facts, applicable legislation and HMRC practice at the relevant time. You should contact us for advice tailored to your circumstances before taking or refraining from any action.
