Part 4: Income tax, corporation tax and capital gains tax Section 23 and Schedule 4: Pensions: annual allowance Details of the section and Schedule 4 Part 4: Reduction of annual allowance for high-income individuals
Part 4 introduces a taper to the existing £40,000 annual allowance for those with incomes, including the amount of any pension savings, above £150,000. This means that for each £2 of income above £150,000, an individual’s annual allowance would reduce by £1. Once an individual’s income reaches £210,000 or over, their annual allowance will be £10,000. This has effect from 6 April 2016.
	Paragraph 10(1) inserts new sections 228ZA and 228ZB into FA 2004.
	New section 228ZA provides the formula for calculating the reduction in the annual allowance if the individual is a high-income individual for the tax year. Where this applies the individual's annual allowance for that tax year, which for 2016-17 would normally be £40,000, is reduced gradually to £10,000 based on the amount their adjusted income exceeds £150,000. This means that for 2016-17, a high-income individual will have their annual allowance reduced by £1 for every £2 by which their adjusted income exceeds £150,000. Where the adjusted income is £210,000 or above, the individual's annual allowance will be £10,000.
	New subsection (2) ensures that where the tapered annual allowance applies, an individual's annual allowance for a tax year will always be a whole number of UK pounds.
	New subsection (3) defines a high-income individual for a tax year as someone with adjusted income of greater than £150,000 and threshold income of greater than £150,000 less the normal annual allowance for the tax year. As the annual allowance for 2016-17 will be £40,000, the individual would need to have threshold income above £110,000 to be affected in 2016-17.
	New subsection (4) defines adjusted income as the individual's net income plus the value of any pension savings for the tax year, but less the amount of certain lump sum death benefits paid to the individual during the tax year. Adjusted income is worked out by calculating the individual's net income for the tax year as defined by steps 1 and 2 of section 23 of the Income Tax Act (ITA) 2007, but excluding certain pension reliefs. This is all the individual's taxable income for the year, less the reliefs that may be deducted under section 24 ITA 2007, except those in respect of pension contributions. The amount of any deductions for pension contributions under net pay (section 193 of FA 2004) or corresponding relief under paragraph 51 of Schedule 36 to FA 2004, plus the value of any employer contribution are added to the individual's net income to determine an individual's adjusted income for a tax year. Employer contributions are included in this definition to ensure the rules work fairly for both those who are self-employed and those in employment who can receive as part of their remuneration package a valuable employer contribution. Certain lump sum deaths benefits are excluded from the income definition. This applies where prior to 2016-17 the tax charge would have been the liability of the scheme administrator, but under changes made by new section 636A(4ZA) of the Income Tax (Earnings and Pensions) Act 2003 , liability for any tax on a lump sum paid to an individual, will be the liability of the recipient.
	New subsection (5) defines threshold income. This will normally be the individual's net income for the year, less the amount of any lump sum death benefits paid to the individual during the tax year that can be deducted from the adjusted income. This is however subject to new subsection (6). The threshold income provides an income floor, so that individual's with net income below will not be subject to the tapered annual allowance for that tax year regardless of the value of their pension contributions.
	New subsections (6) and (7) prevent individuals entering into a salary sacrifice or flexible remuneration arrangement on or after 9 July 2015 in order to reduce their threshold income. Where this applies, the amount of income given up is added back to the individual's threshold income under new subsection (5).
	New section 228ZB introduces anti-avoidance provisions for the purpose of new section 228ZA. Where conditions A to C are met the amount of any income reduction is ignored under new subsection (5) when calculating the tapered annual allowance.
	New subsections (2) to (4) set out conditions A to C. These apply where an individual has a higher annual allowance for a tax year, through a reduction to their adjusted or threshold income, but where that reduction is offset by an equivalent increase in their adjusted or threshold income in a different tax year.
	New subsection (7) sets out that an increase under new subsection (4) includes what would have been an increase in the individual's adjusted or threshold income for 2015-16 had those definitions existed for that year, and how the pension input amount is calculated for this purpose.