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Education Pensions e-briefing - Employers need to prepare for introduction of pensions tapered annual allowance for higher earners

  • United Kingdom
  • Education - Briefings


From 6 April 2016, the pensions annual allowance will be reduced for many individuals with taxable income (which includes employer and employee pension contributions) of over £150,000 per year. For individuals with taxable income in excess of £210,000 per year the pensions annual allowance could be reduced to as low as £10,000.

The tapered annual allowance is likely to affect senior people within organisations and it is also likely to lead to a number of queries from employees. Therefore, in most cases employers will need to assess which of their staff may be affected, decide their approach (to the extent that any action is possible, taking account of scheme provisions and collective agreements) and communicate with their staff (see “Actions for employers” below).

What is the tapered annual allowance?

The tapered annual allowance is the name given to the policy announced by the Chancellor in his Summer Budget which will see the pensions annual allowance (i.e. the annual limit on the amount of tax-relieved contributions/benefits an individual can make to/build up within a registered pension scheme in a tax year) reduced below the standard rate of £40,000 for higher earners.

Who will the tapered annual allowance apply to?

The new, tapered annual allowance will apply to individuals with:

  • a ‘threshold income’ above £110,000 per year, and

  • an ‘adjusted income’ (including employer and employee pension contributions) above £150,000 per year.

An individual’s ‘threshold income’ is broadly their taxable income, which includes their employment income as well as income from other sources such as rental properties and dividends, less certain allowances and reliefs. An individual’s threshold income does not include employer or employee pension contributions to a defined contribution (DC) pension scheme or accrual within a defined benefit (DB) pension scheme. However, salary given up in exchange for pension provision under a salary sacrifice arrangement or a flexible remuneration arrangement made on or after 9 July 2015 will need to be included.

An individual’s ‘adjusted income’ is their threshold income plus employer and employee pension contributions to DC pension scheme and the value of accrual under DB pension scheme in the relevant tax year.

The fact that an individual’s income for these purposes includes income other than just employment income means that, in practice, it will be very difficult for an employer to identify with certainty all of its staff to whom the tapered annual allowance will apply.

How will the tapered annual allowance work?

Individuals with a threshold income above £110,000 per year and an adjusted income above £150,000 per year will see their annual allowance reduced by £1 for every £2 by which their adjusted income exceeds £150,000, subject to a minimum annual allowance of £10,000, as illustrated below.

Individual’s ‘adjusted income’

Annual allowance












The carry forward of unused annual allowance from previous tax years will continue to be available. The amount available to carry forward for tax years starting on or after 6 April 2016 will be based on the unused tapered annual allowance, where this applies to an individual in the relevant tax year.

Actions for employers

In advance of 6 April 2016, all employers need to:

  1. identify in broad terms the staff to whom the tapered annual allowance is likely to apply
  2. decide their response, including reviewing whether to limit benefits or contributions in any way (to the extent that this is legally possible) and, if so, deciding what to provide as an alternative
  3. implement any changes (which may require changes to contracts of employment and pension scheme rules and may also require a minimum 60 day consultation period with affected staff), and
  4. inform their staff about the tapered annual allowance and how they are responding.

Within the education sector, the ability of an employer to take action in response to the application of the tapered annual allowance may be limited.  Schemes such as the Local Government Pension Scheme, the Teachers’ Pension Scheme or the Universities’ Superannuation Scheme cannot be changed by an individual employer, though employers who have their own in-house schemes may be able to implement changes.  Similarly, in many cases, employment terms in the education sector are subject to collective bargaining, with limited scope for employers to agree different terms with individual employees. 

Despite these restrictions, education sector employers should still consider what options may be open to assist staff who are affected by the tapered annual allowance.  For instance, an employee may wish to opt out of scheme membership in return for payment of an additional cash allowance or non-cash benefit.  Whilst considerable care needs to be taken when agreeing such terms because of the automatic enrolment laws, this may present a viable solution in some circumstances.  There may also be other flexibilities within the scheme’s rules, such as switching into the 50:50 section in the LGPS (which will reduce the employee’s accrual rate, meaning that the impact of the tapered annual allowance will also be reduced).

Regardless of whether any such changes can be made, employers that operate salary sacrifice or flexible remuneration arrangements in connection with their pension scheme will also need to work out how that arrangement should be treated for the purposes of calculating an individual’s ‘threshold’ income. For example, where a salary sacrifice arrangement is renewed or modified (for example, where contribution rates are changed) on or after 9 July 2015, it may need to be included in the calculation of an individual’s threshold income, depending upon the terms of the arrangement.

Where a new joiner enters into an employer’s existing salary sacrifice arrangement on or after 9 July 2015, this will need to be included in the calculation of the individual’s threshold income.


We hosted a webinar recently to help employers prepare for the introduction of the tapered annual allowance. To listen to the recording and access the slides click here.