Having just had the last Spring Budget, delivered by a very humorous Chancellor Philip Hammond, it is back to the day job, with thankfully few further changes to our ever complex pensions regime. That said, it may not have created any more complexity, but it certainly hasn’t simplified any of the complexity and advisers, clients and providers face.

One of the areas concerning advisers and clients at the moment is the tapered annual allowance, which took effect on 6 April last year. This will impact high numbers of SIPP policyholders as they tend to be higher earners and will see their allowances reduced, even to just £10,000.

The tapered annual allowance currently applies to anyone with adjusted income of over £150,000 per annum and their threshold income for the same tax year is more than £110,000.

The annual allowance is reduced by £1 for every £2 of income that is over £150,000, but it is subject to a minimum of £10,000, that everyone will receive. So, those who have income over £210,000 per annum will have a tapered annual allowance of £10,000.

This all sounds fairly simple, and to be honest, the actual calculation is, but getting to that point is far from simple. This is an area that clients will need expert advice on to ensure they get it right.

The complexity comes with the two definitions of income, threshold income and adjusted income. This is really important because the adjusted income calculation is not required if the income level is below the threshold income level.

So, if you had an income of £175,000 (£25,000 over the £150,000) the standard annual allowance of £40,000 would be reduced by £12,500. This is the £25,000 divided by 2 and the tapered annual allowance would therefore be £27,500 (£40,000 - £12,500).

If however you had an income of £225,000 (£75,000 over £150,000), the standard annual allowance would ordinarily be reduced by £37,500 (£75,000 divided by 2). As this would put the tapered annual allowance at only £2,500 the minimum of £10,000 will therefore apply.

It is also important to remember that threshold income includes any payments made under a salary sacrifice arrangement made on or after 9 July 2015. Even though a member might be subject to a tapered annual allowance, they will still be able to utilise carry forward for any unused allowances from the previous three tax years with the annual allowance from those previous years.

Elaine Turtle, Director, DP Pensions