How to get 60% tax relief on pension contributions

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 nearly 67%

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

Any pension contributions made by an individual, whether gross contributions to an occupational pension scheme or gross contributions 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 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 £25,000 can make for a client with income of £125,000.

How the numbers work

A pension contribution of £25,000 (including the basic tax relief) only results in a reduction to income after tax of £10,000. The difference is £15,000, giving an effective tax relief rate of 60% [£15,000/£25,000 = 60%].

Note that the pension contribution of £25,000 extends the amount of income subject to basic rate tax by this amount. So, £62,500 [£37,500 plus £25,000] is subject to basic rate tax, with the balance of taxable income of £50,000 subject to higher rate tax.

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

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

how the numbers work

How the numbers work

By using salary exchange, the employer pension contribution is £28,450.00 (employer NI saving of £3,450.00 plus salary exchange of £25,000). Income has reduced by £9,500.00. The difference is £18,950.00, giving an effective tax relief rate of nearly 67% [£18,950.00/£28,450.00 = 66.61%].

Note

The figures are based on UK income tax and National Insurance rates, excluding Scotland effective from 6 April 2019.

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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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.