Tapering the Annual allowance
4 steps
Calculate total gross income from all relevant earnings
* Earnings from self-/ employment inc comissions, bonus & overtime
* Does not include income from buy to let properties or interest from investments
Calculate threshold income
* Gross income - individual gross pension contributions. If above £200k then proceed
Calculate adjusted income
* Gross income + employer gross pension contributions. If above £260k then AA needs to be tapered
Tapering AA
* AA reduced by £1 for every £2 of adjusted income above £260k
Using carry forward of previous years unused AA
3 steps to remember
- Must use current year’s AA first
- Can only go back 3 years for unused AA
- Go back to oldest year first - 2022/23 AA was £40k & been £60k since
- Cannot contribute more than their UK relevant earnings in current tax year
- Must have been a member of registered pension scheme earlier in the tax year
Converting part of a DB scheme for PCLS
3 steps & all different calcs
- Work out PCLS using commutation factor calc
Pre-commuted pension x C DIVIDED BY (1+(0.15 x C)) = PCLS - See what difference this makes to the pension
PCLS divided by commutation factor = reduction to scheme pension - Work out reduced scheme pension to go along with PCLS
Pre-commuted pension - reduction in step 2 = Reduced scheme pension
C = commutation factor
DB Scheme - Working out PCLS using Commutation factor calculation
Pre-commuted pension x C
DIVIDED BY
(1+(0.15 x C))
C = commutation factor
The bottom part of the calc does not change
Employer contributions increasing significantly. Process to assess whether tax relief needs to be drip fed over a number of years
4 steps
- Does this years contribution exceed 210% of last years? If so, proceed
- Is the excess contribution over 110% of prev years & £500k? If so, spread over number of tax years
- Work out number of years for spreading
- Work out amount relieved this year and subsequent years
- HMRC allow certain amount of increase each year. If within 210% of prev year then nothing to do
- If excess <£500k, then all qualifies in current accounting period
- Excess between 500k & £1m = 2 years, between £1m & £2m = 3 years, over £2m = 4 years
DB schemes - Tested against Annual Allowance
Working out clients annual allowance value
2 steps
- Years service / 60 x pensionable salary = accrued pension
- Accrued pension x 16 = Annual allowance value
- 1/60 accrual rate used as an example
- 16:1 factor system always used
Calculating AA input value increase
- Calculate both AA values
- Adjust last years value by inflation (see footnote)
- Subtract adjusted AA value for last year from this years to get the AA input value
Convert the inflation % to a decimal. e.g. 0.5% inflation increase would be 1.005
Multiply last years value by 1.005 to get inflation adjusted AA value
Primary protection - Max PCLS
- TFC entitlement at A-day x 1.2 = Maximum available TFC
Enhanced protection - PCLS entitlement
- Work out what the PCLS % figure is of the total benefits at A-day.
PCLS / benefits value x 100 = PCLS % figure - Multiply fund value on 05/04/2023 by % figure = enhanced protected TFC
