The maximum tax free payment into a pension scheme anyone can make in a tax year, is £40000.00 or up to their annual salary, if their annual salary is below £40000.00. A carry forward of unused pension allowance, can on occasion increase this theshold. Any payments into the pension scheme above the threshold are subject to tax and are declared in a Self Assessment Tax Return.
For very high earners, this threshold of £40000.00 can be reduced down to £4000.00 and is called the "tapered annual allowance".
PTM057100 is used to calculate the pension threshold where an individuals income exceeds £240000.00 in the tax year. For every £2.00 over this threshold, the £40000.00 threshold is reduced by £1.00, down to a minimum of £4000.00. This is ""adjusted income"" and is not the same as ""adjusted net income"". Adjusted net income is used to calculate High Income Child Benefit Charges and Personal Allowances.
A workplace pension is a way of saving for your retirement that’s arranged by your employer. Some workplace pensions are called ‘occupational’, ‘works’, ‘company’ or ‘work-based’ pensions. A percentage of your pay is put into the pension scheme automatically every payday. In most cases, your employer also adds money into the pension scheme for you.
You may also get tax relief from the government.
Where tax relief is given at source (the employer deducts the pension payment before calculating the tax due), then the pension payment should not be included in working out adjusted net income, as these payments are not taxed and have already reduced the income subject to tax. Where pension payments are made after tax is deducted, the employer can claims 20% tax relief, to add to the pension pot. Individuals who pay higher rate tax, can then claim personal pension relief, to claim a further 20% tax relief.
A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit, in this case a pension.