60% tax relief on pension contributions

Since 6 April 2010, the personal allowance will be reduced by £1 for every £2 of income above £100,000. Making a pension contribution can reduce income and protect the personal allowance, resulting in tax relief of 60%.
Key facts
  • A pension contribution for people earning between £100,000 and £123,700 gives an effective tax relief rate of 60%.
  • Using salary exchange increases this effective tax relief rate to nearly 67%

How to get 60% tax relief

The personal allowance is reduced by £1 for every £2 of income above £100,000. This means that when income is £123,700 or more, the personal allowance will be nil. The effective tax rate for income between £100,000 and £123,700 is 60%. This is the case because in addition to paying 40% tax on any income above £100,000, there's the impact of losing some or all of the personal allowance and paying 40% tax on that income too.

Where salary exchange is used the effective rate of tax relief is increased to nearly 67%.

The rates used in the following examples are based on UK income tax rates and bands, excluding Scotland.

The example below shows the difference a personal pension contribution of £23,700 can make for a client with income of £123,700.

Example 1

 Before pension contributionAfter pension contribution
Taxable income £123,700 £123,700
Personal allowance £0.00 £11,850
Employee NI £6,098.12 £6,098.12
Employer NI £15,908.09 £15,908.09
Tax £42,580 £33,100
Pension contribution (net) £0.00 £18,960.00
Employer pension contribution £0.00 £0.00
Income after tax £75,021.88 £65,541.88

How the numbers work

A pension contribution of £23,700 (including the basic tax relief) only results in a reduction to income after tax of £9,480. The difference is £14,220, giving an effective tax relief rate of 60% [£14,220/£23,700 = 60%].

Note that the pension contribution of £23,700 extends the amount of income subject to basic rate tax by this amount. So, £58,200 [£34,500 plus £23,700] is subject to basic rate tax, with the balance of taxable income of £53,650 subject to higher rate tax.

This effective tax relief rate is available to all clients with income between £100,000 and £123,700.

The example below shows the additional saving that can be made by using salary exchange.

Example 2

 Before pension contributionAfter pension contribution
using salary exchange
Taxable income £123,700 £100,000
Personal allowance £0.00 £11,850
Employee NI £6,098.12 £5,624.12
Employer NI £15,908.09 £12,637.49
Tax £42,580.00 £28,360.00
Pension contribution (net) £0.00 £0.00
Employer pension contribution £0.00 £26,970.60
Income after tax £75,021.88 £66,015.88

How the numbers work

By using salary exchange, the employer pension contribution is £26970.60 (employer NI saving of £3,270.60 plus salary exchange of £23,700). Income has reduced by £9,006.00. The difference is £17,964.60, giving an effective tax relief rate of nearly 67% [£17,964.60/£26,970.60 = 66.61%].

Note

The figures are based on UK income tax and National Insurance rates, excluding Scotland effective from 6 April 2018.

The salary exchange figures assume that the employer has passed the savings they've made in reduced National Insurance contributions on to the employee, by making a higher pension contribution.

The figures shown are for illustration purposes only.

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.

All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.

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Last updated: 05 Apr 2018

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