Spring Budget 2023 Minimum Tapered Annual Allowance and Adjusted Income

Published / Last Updated on 15/03/2023

In the Spring 2023 Budget the pension Annual Allowance (AA) i.e., the maximum value or equivalent value that can be contributed by both you and your employer to your pension schemes each tax year was increased from £40,000 pa to £60,000 pa from 06/04/2023.  If you exceed this allowance, you face tax penalties.  However, if you exceed a certain level of overall income, the annual allowance is reduced i.e., tapered back.  This is called the Tapered Annual Allowance.

How is the Annual Allowance Calculated?  Pension Allowances

What is the Tapered Annual Allowance?

If your adjusted income is above a certain limit, then the maximum amount you and your employer can contribute to pension schemes in total is scaled down.  Your total income goes through two tests:

  • THRESHOLD INCOME TEST: Gross Income package (salary, car, dividends, med ins etc) less YOUR OWN Pension Contributions only = “net” Threshold Income*  (*Salary Sacrifice Payments Set Up After 08/07/16 must be included). 
    • If your ‘Threshold Income’ is below £200,000 there is NO TEST
    • If Threshold Income is above £200,000 there is then an ADJUSTED INCOME TEST.
  • ADJUSTED INCOME TEST: Your “net” Threshold Income plus ALL Pension Contributions (Employee + Employer).
    • The Adjusted Income limit was increased effective 6 April 2023 from £240,000 to £260,000
    • Is your Adjusted Income above £260,000?

If your Adjusted Income is above £260,000 then your Pension Annual Allowance (£60,000 from 6 April 2023) is cut by £1 for every £2 Adjusted Income over £260,000 (Adjusted Income Threshold for Tapered Annual Allowance).

Minimum Tapered Annual Allowance (MTAA) from April 2023

This was increased effective 6 April 2023 from £4,000 pa to £10,000 pa.

Example:  If "Adjusted Income" = £340,000 then your pension AA is reduced i.e., tapered:

  • £340,000 (Adjusted Income) minus £260,000 = £80,000 over = 2 for 1 reduction = £40,000 reduction of AA from £60,000 pa to £20,000 pa i.e., the maximum you and employer can pay into pensions without facing tax charges is £20,000.

The lowest the Minimum Tapered Annual Allowance (MTAA) can be reduced to was £4,000 pa and is now £10,000 pa.

  • If “Adjusted Income” = £360,000 (or more) minus £260,000 = £100,000 over = 2 for 1 = £50,000 reduction of AA from £60,000 pa to £10,000 pa.

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