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Tapered annual allowance: what is it and how does it affect me?

Building your pension fund efficiently can be complex, especially since there are so many tax rules that can apply to you.

Among them, is the tapered annual allowance, which could be a contributing factor towards how well you build your wealth for retirement.

In light of this, we’ve put this guide together on what the tapered annual allowance is, how it can affect you, and how things like expert advice and financial planning resources can help you make the most of it.

What is the tapered annual allowance?

To understand what the tapered annual allowance is, you first need to know what your standard pension allowances are.

These are specific limits that are set on your pension contributions, that up until this amount, allow you to shelter any money invested in your pension from tax. As of the current tax year 2022/2023, the allowances are:

The annual allowance – The amount you can contribute to your pension each year while remaining sheltered from tax – £40,000.

The lifetime allowance – The amount you can contribute to your pension in your lifetime while remaining sheltered from tax – £1,073,100.

When it comes to the tapered allowance, this applies to any high earners who have a threshold income above £200,000, and an adjusted income over £240,000. For these individuals, your annual allowance is ‘tapered’, meaning it is reduced at a certain rate depending on how much your adjusted income exceeds £240,000.

How can the tapered annual allowance affect you?

If you earn above the £240,000 threshold, as of the current tax year, your annual allowance is ‘tapered’ at the following rate:

  • For every £2 your adjusted income goes over £240,000, your annual allowance is reduced by £1. For example, if you were to have an adjusted income of £280,000, your annual allowance would be reduced to £20,000.
  • The allowance tapering is limited to an adjusted income of £312,000, meaning the minimum tapered annual allowance you can have is £4,000.

This means you’ll have less money you’re able to shelter from tax each year when you invest in your pension.  Our lifetime allowance, however, will remain the same regardless of your tapered annual allowance.

Without a careful and expert plan for your pension contributions, you risk having an inefficient approach to building your retirement fund, where much of your money could be lost through tax charges.

How can you make the most of your tapered annual allowance?

There are many things you can do to ensure you make the most of your tapered annual allowance, which include:

  • Seeking financial advice

One of the most important steps for managing your tapered allowance is to seek financial advice. The expert guidance from your wealth manager will give you a unique approach to your pension contributions that’s tailored to your current financial circumstances.

This will ensure you make the right contributions to shelter as much money from tax as possible, and build your wealth in the most effective way.

  • Diversifying your investment tax wrappers

You can also diversify your investment tax wrappers to make the most of your tapered allowance. Once again, your adviser is key here, as they can show you all the options you could explore to shelter your money from tax when investing.

Once you’ve reached your tapered allowance limit, you can diversify your investments to other tax wrappers such as individual savings accounts (ISAs), which as of the current tax year, have an annual allowance of £20,000.

  • Taking advantage of financial planning tools

It’s also important to take advantage of the financial planning tools provided by your expert wealth management service.

These advanced tools can accurately analyse your current financial circumstances, and provide key data on the potential tax charges that may apply to you. You’ll be able to calculate how much tax you may be charged by your contributions, according to the current allowance and tax rates.

With an expert wealth manager guiding your approach, you’ll have what you need to start navigating your tapered annual allowance, and build your wealth in a way that’s best suited to you.

Please note, the value of your investments can go down as well as up.

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