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.
|Before pension contribution||After pension contribution|
|Pension contribution (net)||£0.00||£18,960.00|
|Employer pension contribution||£0.00||£0.00|
|Income after tax||£74,021.88||£65,541.88|
How the numbers work
A pension contribution of £23,700 (including the 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.
|Before pension contribution||After pension contribution |
using salary exchange
|Pension contribution (net)||£0.00||£0.00|
|Employer pension contribution||£0.00||£26,970.60|
|Income after tax||£74,021.88||£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%].
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.
Any research and analysis has been provided by us for our own purposes and the results of it are being made available only incidentally.
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.