Threshold income vs adjusted income: the two numbers behind the taper

The tapered annual allowance runs on two separate income figures, and the names don't help. Threshold income decides whether the taper applies at all. Adjusted income decides how big the reduction is. The adjustments depend on how contribution relief was given; adding every contribution again can double-count it.

What goes into each

Both start from net income under steps 1 and 2 of the income-tax calculation: income after the relevant income deductions, but before personal allowances, the savings allowance or dividend nil rate. This can include earnings, profits, rent, savings, dividends and a chargeable event gain. From there they diverge:

For threshold income, deduct gross relief-at-source contributions. Net-pay contributions have already reduced net income: do not deduct them twice. Add back pay given up under relevant salary-sacrifice or flexible-remuneration arrangements made after 8 July 2015.

Adjusted income restores net-pay and transitional corresponding relief, together with relief claimed under Finance Act 2004 s.193(4) or s.194(1). It then adds total pension input less member contributions, including the gross relief-at-source contributions in that subtraction. Relief-at-source contributions have not reduced net income, so they are not added back separately. Both tests also deduct the relevant lump-sum death benefits taxable as pension income. These are HMRC’s specific adjustments, not a rule to add every pension contribution to income. Relief claimed under s.193(4) or s.194(1), for example on a retirement annuity contract, has already reduced net income, so it stays deducted for threshold income. In ParaplanAI, enter a contribution relieved by a claim in the net-pay and claim-relieved contributions box: it is added back to adjusted income and stays deducted from threshold income.

How they work together

The gate comes first. If threshold income is £200,000 or less, there is no taper at all, whatever the adjusted income. Take a member with £215,000 of net income who makes a £25,000 gross relief-at-source contribution, with no other threshold-income adjustments. Threshold income is £190,000, under the gate, so the taper does not reduce the ordinary £60,000 allowance — even where adjusted income runs well over £260,000. Any MPAA test remains separate.

Clear the gate, and adjusted income sets the cut: the £60,000 falls by £1 for every £2 above £260,000, to a £10,000 floor. Take adjusted income of £290,000:

The common mistake is to test only adjusted income and skip the £200,000 threshold gate, over-restricting a member whose threshold income does not clear the gate. Another is reaching for the pre-2023/24 figures (£240,000 start, £4,000 floor). Both are easy to check on the tapered annual allowance calculator, which shows both income figures and the reduction; for the whole position alongside carry-forward and the MPAA, use the pension annual allowance calculator. The mechanics, worked further, are in the tapered annual allowance explainer.

PTM057100 (threshold & adjusted income ; the two-test taper) · 2023/24 figures per Finance (No. 2) Act 2023