Planning for retirement

Tapered pension allowance for high earners

  • Shunil Roy-Chaudhuri, Personal Finance and Investment Writer
  • 03 January 2024
  • 7 mins

There are limits to how much people with high incomes can put into pensions free of tax. The rules here are not simple, but individuals who might fall within their scope may well benefit from becoming familiar with them.

HMRC makes two assessments of income for annual pension allowance. You will only face restrictions on your pension allowance if you exceed both of these assessments.

In practice, you are first assessed on what is known as your ‘threshold income’. If this exceeds £200,000, then you will also be assessed on what is described as your ‘adjusted income’. Put simply, threshold income is net income excluding pension contributions, while adjusted income is net income including all pension contributions (including those from your employer).

According to HMRC rules, should your adjusted income be £260,000 or less, then you will face no restrictions on your pension contributions. If your adjusted income exceeds £260,000, then you will have your annual pension allowance reduced, or tapered, by £1 for every £2 your adjusted income exceeds £260,000. On this basis, someone with adjusted income of £270,000 would have their pension allowance reduced by £5,000.

The rules on adjusted income mean you can invest up to £60,000 (the maximum annual pension allowance) tax-free in a pension if you have an adjusted income of up to £260,000. However, this will dwindle to just £10,000 for an annual adjusted income of £360,000 or more (see chart). All earners above this level will have a pension allowance of at least £10,000.

Pension allowance tapers as adjusted income rises

Net income

Before we come to threshold income and adjusted income, we first need to understand ‘net income’. This includes items such as:

  • earnings from employment

  • earnings from self-employment or partnerships

  • bonuses

  • most pension income (State, occupational or personal pensions)

  • rental income from property

  • interest on most savings

  • dividend income

  • trading profits.

Added together, these comprise your ‘total income’. You then calculate your net income by deducting any relevant tax reliefs. These could include payments made to your pension scheme that had tax relief but were paid before the relief was given (perhaps because someone else paid into your pension).

Threshold income

To work out your threshold income you must make the following amendments to net income:

  • Deduct your gross contributions to pension schemes where you had what the government describes as relief at source. This excludes employer contributions. Under the tax relief at source arrangement, if the relevant basic tax rate is 20 percent and you want to make a £100 contribution, then you only need to pay £80. The administrator reclaims £20 from HMRC and puts this into your pension, raising the pension contribution to £100.

  • Deduct any taxed lump sum death benefits from registered pension schemes (typically available to beneficiaries, such as widows or widowers, of people who have died with pension savings, usually at the age of 75 or over).

  • Add any relevant salary sacrifice or flexible remuneration arrangements, made after 8 July 2015. Under a salary sacrifice arrangement, the employee in effect exchanges some of their salary for contributions to their pension by their employer. As a result, the employee’s salary falls, meaning the employer pays less National Insurance (NI). Some employers then add the saved NI to the pension contributions paid to the employee’s pension, with the intention of leaving the employee in a stronger financial position overall.

If your annual threshold income is no more than £200,000, then your pension allowance will not be subject to tapering. However, if your threshold income exceeds £200,000, then you will have to calculate your adjusted income.

Adjusted income

To assess adjusted income, go back to the net income figure and then make the following amendments:

  • Add savings to your pension schemes on which tax relief was given.

  • Add claims for tax relief on pension savings where they were paid before tax relief was given.

  • Add pension savings made for you by your employer.

  • Deduct lump sum death benefits from registered pension schemes.

  • Non-domicile individuals (whose permanent home is outside the UK), should add relief claimed on savings made to overseas pension schemes.


Anita’s salary is £215,000. She receives a bonus of £40,000 and makes £10,000 in rental income from a property. Anita contributes £30,000 into her group personal pension and her employer contributes £30,000.

On this basis, Anita’s threshold income is £235,000. This comprises a salary of £215,000, plus a bonus of £40,000, plus rental income of £10,000, minus her pension contribution of £30,000.

Meanwhile, Anita’s adjusted income is £295,000. This comprises a salary of £215,000, plus a bonus of £40,000, plus rental income of £10,000, plus her employer’s pension contribution of £30,000.

Anita will be impacted by the tapered annual pension allowance because her threshold income is greater than £200,000 and her adjusted income is greater than £260,000, by £35,000. So, her annual allowance of £60,000 will now be reduced by £17,500 (£35,000 divided by 2) and therefore will amount to £42,500 for the 2023/24 tax year. Anita will now be liable for a tax charge as her total pension contributions of £60,000 are now greater than her reduced annual allowance.

Unused pension allowances

Anita may be able to offset this tax charge if she has unused pension allowances from earlier tax years and she meets certain conditions. The arrangement here is known as carry forward.

If you’re close to breaching your annual allowance, or you may have exceeded it, or you might be able to reduce it, then you could consider taking advice. At Schroders Personal Wealth one of our key principles is to have regular reviews with an adviser. Financial advisers can help you to make the most of tax opportunities, in line with your unique circumstances.

Important information

This article is for information purposes only. It is not intended as investment advice.

Fees and charges apply.

The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn’t guaranteed and can go down as well as up. The benefits of your plan could fall below the amount(s) paid in.

The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents in relation to specific situations and particular circumstances.

Any views expressed are our in-house views as at the time of publishing. This content may not be used, copied, quoted circulated or otherwise disclosed (in whole or in part) without prior written consent.

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