Pension Allowance....are you aware of the reduction?

Up until 5 April 2016, an individual could potentially pay £40,000 (including tax relief) into a pension plan each year - so for example, the individual may contribute cash of £32,000 which is topped up by £8,000 in basic rate tax from HMRC, making the total contribution £40,000. The only restriction being that the individual must have income of at least £40,000.

However, from 6 April 2016, the amount that can be paid into a pension plan (and obtain tax relief) may be limited, where your income (including any employers pension contributions) exceeds £150,000. Now where an individual “earns” in excess of £150,000, the pensions allowance of £40,000 is reduced by £1 for every £2 of income over £150,000.


Stuart earns £135,000 as an employee. Let’s say the employer also contributes 14% of his earnings to a pension fund but Stuart does not. Stuart also has rental income (no expenses) of £30,000.

His total income for these purposes is deemed to be:

£135,000 + (14% x £135,000) + £30,000 = £183,900

Income in excess of £150,000 = £33,900

Allowance reduced for £1 for every £2 of excess i.e. £33,900 / 2 = £16,950

Revised allowance = £40,000 - £16,950 = £23,050

This means that Stuart can only benefit from tax relief on pension contributions of £23,050 which is fine as this is greater than the pension contributions paid into the pension scheme by his employer.

However, if Stuart had rental income of say £45,000 then his pensions allowance would be £15,550. As his employer has actually contributed £18,900 (£135,000 x 14%), Stuart has received too much tax relief as the pension has been overfunded by £3,350. Stuart would be required to pay tax on this amount and declare the excessive payment on a Self Assessment Tax Return.

Who may this impact?

Clearly this will impact upon high earning employees, as illustrated by the above example, particularly those who are a member of a Government pension scheme such as the NHS superannuation scheme or the Teachers Pensions scheme.

In addition, this is likely to have an impact upon business owners as a lot of owner managed companies make pension contributions on behalf of the director as this is not limited to the individuals earnings, the contribution is not a taxable benefit for the director and also the company should obtain corporation tax relief on the payment.

What other factors should be considered?

There may be other factors to consider including:

· Unused pensions allowance from earlier years.

· Any personal pension contributions made.

· Any other income reducers such as losses, gift aid donations etc.

· One off increases in employer pension contributions.

· Issues surrounding the amount saved in the pension particularly where this is in excess of (or expected to exceed) the lifetime allowance of £1m

This is a very complex area and each individuals circumstances will be unique. If you feel that you may have an issue to consider, we would recommend that you speak to our private client tax team today on the following numbers:

Darlington – 01325 349700
Durham – 0191 3842244
York – 01904 784400