Pension taper planning

[Wakka]

Currently in a position where I should make a leap in earnings in a couple of years - primarily due to LTIPs. This should push me into pension tapering rules and I want to plan ahead.

Has anyone been in this situation and reduced their pension contributions in the current year so that they can utilise carry forward rules to get under the threshold income in later years?

I've been doing some online research but I cannot see much which talks about maximising contributions over a number of years and I'm not sure if I'm missing something obvious.

Have you tried using HMRC’s annual allowance calculator? https://www.tax.service.gov.uk/pension-annual-allowance-calculator

You’ll need to include both yours and your employer’s pension contributions. It will give you a good idea on what you can “carry forward” so you can plan ahead.

This is assuming the government doesn’t change the allowances again!

The government changing rules is definitely a concern!

I am ok on the basics of the rules and contributions allowed but it's really whether I'm missing something obvious.

As a simplistic example: say I earn £180k in 2026/27 but I expect to earn £300k in 2027/28, my view is that I'm better off only putting £20k into my pension in the first year so that I can put £100k in the following year utilising carry forward rules and not be subject to tapering. Over the two years I'm putting in £120k, whereas if I maximised the first year I'd be limited to £40k in the second year without a tax charge, so £100k total over the two years.

All ignoring employer contributions etc.

Yes I would agree. Also if you are in a scheme where your employer pays contributions too making sure that you can take full advantage of this ie not using too much of your allowance one year so you miss out on employer contributions the next year.

Most employers will have an arrangement for higher earners if they’re affected by the tapered annual allowance and can’t take advantage of employer contributions so if this is applicable it’s worth exploring.

Thank you. The employer contributions point is a good one and adds some complexity.

Does the principle hold up if I expand over more years? E.g.
Yr 1 - 180k income
Yr 2 - 180k income
Yr 3 - 180k income
Yr 4 - 300k income
Yr 5 - 300k income
Yr 6 - 300k income
Yr 7 - 200k income

Would you limit contributions in years 1-3 on the expectation of years 4-6 or is the extended timeframe adding in more risk and therefore not worth it?

Am I missing something?

y1- put in £20k
y2- carry forward £40k and use tapered £40k for that year- total £80k

Grand total £100k.

I don’t understand where you’re getting £100k in y2 from.

It wouldn't be tapered if my threshold income was under 200k. So if I can do that via carry forward contributions then I wouldn't be restricted to 40k in that year.

Probably confusing that I've used 200k exactly whereas it would need to be, say 199k in reality.

Oh yes, sorry am being dim.

Not at all. I've been poring over the rules recently and I still have to double check everything any time I think about it. Especially calculation of adjusted income which feels like it's doubly penalising you.

Bear in mind that you carry forward from the furthest of the 3 years first.

You only get carry forward if you max out the current year.

By not maxing out this year (25/26) you will lose carry forward for 22/23, if available.

You should obviously try to max out all tax years but your marginal rate of tax saving will be more if pension contributions on £180k (60% marginal) bring you below the £100k. A £100k reduction on £300k does not give you the same tax saving as it’s all taxed at 45% above £125k.

Good point @messybutfun. My figures were illustrative but there are considerations around the 60% marginal rate. I don't have any carry forward left I don't think from 22/23. But it could still be more worthwhile maxing now at a higher rate and losing some ability to contribute tax free in later years.

Might need a spreadsheet!

Maybe it’s too early in the morning for my brain, but so long as you don’t lose allowances by not using them, you should end up being able to put the same amount in in total whichever year you do it in.

So then the question becomes about a) marginal tax rate saved (which sounds like 45% in any case, unless you get down below £125k now; b) employer contributions- in which case it is worth investigating if they offer a cash alternative for people who would hit AA limits and face tax bills; or c) smoothing income so that you put more into your pension as you earn more, which depends on how much income you need.

It’s because the relevant figure for working out if you taper is threshold income, which is net of pension contributions.

Ah of course - that makes sense now post coffee!