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How to get 60% tax relief on pension contributions (excluding Scotland)

Published  04 November 2022
   5 min read

Has your client lost their personal allowance? Would you like to get them 60% tax relief on their pension contributions?

Key facts

  • A pension contribution for people earning between £100,000 and £125,000 gives an effective tax relief rate of 60%.
  • Using salary exchange increases this effective tax relief rate to 67%.

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Since 6 April 2010, the personal allowance is reduced by £1 for every £2 of income above £100,000. If this affects your client, making a pension contribution can reduce income and protect the personal allowance, resulting in tax relief of 60%.  

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 £125,140 or more, the personal allowance will be nil. The effective tax rate for income between £100,000 and £125,140 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. 

The 'income' used by HM Revenue & Customs to calculate the charge is 'adjusted net income' (opens in a new window).

Any pension contributions made by an individual, whether to an occupational pension scheme or to a personal pension, will reduce the final amount of adjusted net income. 

Where salary exchange is used the effective rate of tax relief is increased to 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 £25,140 can make for a client with income of £125,140.

We have assumed an employer National Insurance rate of 13.8% on earnings over £9,100 and an employee rate of National Insurance of 12% on earnings between £12,570 and £50,270 and 2% above £50,270 for the whole tax year.

Table showing the difference a personal pension contribution of £25,140 can make for a client with income of £125,140.. This image is an infographic and has alternative text available if you are using a screen reader.

60% tax relief on pension contributions

The example below shows the difference a personal pension contribution of £25,140 can make for a client with income of £125,140.
This table shows the position before and after the payment of the pension contribution

  • Taxable salary before is £125,140.00 and after is £125,140.00
  • Personal allowance before is zero and after is £12,570.00
  • Employee National Insurance contribution before is £6,021.40 £ and after is £6,021.40
  • Employer National Insurace contribution before is £16,013.52 and after is £16,013.52
  • Income Tax before is £42,516.00 £ and after is £32,460.00
  • Pension contribution (net) before is zero and after is £20,112.00
  • Employer pension contribution before is zero and after is zero
  • Income after tax before is £76,602.60 and after is £66,546.60

How the numbers work

A pension contribution of £25,140 (including the higher rate tax relief) only results in a reduction to income after tax of £10,056. The difference is £15,084, giving an effective tax relief rate of 60% [£15,084/£25,140 = 60%].

Note that the pension contribution of £25,140 extends the amount of income subject to basic rate tax by this amount. So, £62,840 [£37,700 plus £25,140] is subject to basic rate tax, with the balance of taxable income of £49,730 subject to higher rate tax.

This effective tax relief rate is available to all clients with income between £100,000 and £125,140.

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

This image shows the additional savings that can be made using salary exchange. This image is an infographic and has alternative text available if you are using a screen reader.

60% tax relief on pension contributions

This image shows the additional savings that can be made using salary exchange. 


This table shows the position before and after the payment of the pension contribution

Taxable salary before is £125,140.00  and after is £100,000.00
Personal allowance before is zero and after is £12,570.00
Employee NI contribution before is £6,021.40 and after is £5,518.60
Employer NI contribution before is £16,013.52 and after is £12,544.20
Income tax before is £42,516.00  and after is £27,432.00
Pension contribution (net) before is zero and after is zero
Employer pension contribution before is zero and after is £28,609.32
Net income after tax before is £76,602.60 and after is £67,049.40

How the numbers work

By using salary exchange, the employer pension contribution is £28,609.32 (employer National Insurance saving of £3,469.32 plus salary exchange of £25,140). Income has reduced by £9,553.20 The difference is £19,056.12, giving an effective tax relief rate of 67% (£19,056.12/£28,609.32 = 66.61%).

Because different tax bands and rates apply in Scotland the effective of tax relief is different, see How to get 61.5% tax relief on pension contributions for more information.

The figures are based on UK income tax and National Insurance rates, excluding Scotland effective from 6 April 2023.

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.

Disclaimer

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.