How the taper works
If your adjusted income exceeds £260,000, your annual allowance reduces:
- £260,000 of adjusted income → full £60,000 allowance
- £300,000 of adjusted income → £40,000 allowance (£20,000 reduction)
- £360,000+ of adjusted income → £10,000 allowance (minimum floor)
The reduction is £1 of allowance for every £2 of income above £260,000.
Adjusted income vs threshold income
The tapered allowance uses two income definitions:
- Threshold income: broadly your taxable income minus pension contributions. If under £200,000, the taper doesn't apply regardless of adjusted income.
- Adjusted income: broadly your taxable income plus any pension contributions made via salary sacrifice or employer contributions. This is what's compared against the £260,000 threshold.
Both definitions matter because they catch different planning scenarios. The threshold income gate at £200,000 prevents the taper applying to people whose income is only above £260,000 because of large pension contributions.
Why this matters
For very high earners — typically £260,000+ from earnings or substantial bonuses — the tapered allowance significantly restricts pension saving. Someone on £400,000 has just £10,000 of annual allowance, which is two-thirds smaller than the standard cap.
This pushes high earners toward other tax-efficient saving vehicles (ISAs at £20,000/year, VCTs, EIS) once their pension annual allowance is exhausted.
Tax charge if exceeded
Like the standard annual allowance, contributions above your tapered allowance trigger an annual allowance charge equal to your marginal tax rate. For someone in the additional-rate band (45% Income Tax + 2% NI), the charge effectively cancels out the relief that would otherwise have been received.
Specialist tax advice is genuinely useful at this income level — both the calculation of your tapered allowance and the use of carry-forward have more moving parts than the standard rules.