How to get 63% tax relief on pension contributions (Scotland)
Has your client lost their personal allowance? Would you like to get them 63% tax relief on their pension contributions?
Key facts
- A pension contribution for people earning between £100,000 and £125,140 gives an effective tax relief rate of 63%.
- Using salary exchange increases this effective tax relief rate of almost 70%.
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 63%.
How to get 63% 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 63%. This is the case because in addition to paying 42% tax on any income above £100,000, there's the impact of losing some or all of the personal allowance and paying 42% tax on that income too.
The 'income' used by HM Revenue & Customs to calculate the personal allowance reduction is 'adjusted net income'.
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 of almost 70%.
The rates used in the following examples are based on income tax rates and bands for Scotland.
The example below shows the difference a personal pension contribution of £25,140 can make for a client with income of £125,140.
| Pension contribution | Before | After |
| Taxable income | £125,140.00 | £125,140.00 |
| Personal allowance | - | £12,570.00 |
| Employee NI | £6,021.40 | £6,021.40 |
| Employer NI | £16,013.52 | £16,013.52 |
| Tax | £45,876.68 | £35,066.48 |
| Personal contribution (net) | - | £20,112.00 |
| Employer pension contribution | - | - |
| Net income | £73,241.92 | £63,940.12 |
How the numbers work
A pension contribution of £25,140 (including the higher tax relief) only results in a reduction to income after tax of £9,301.80. The difference is £15,838.20, giving an effective tax relief rate of 63% [£15,838.20/£25,140 = 63%].
Note that the pension contribution of £25,140 extends the amount of income subject to basic rate tax by this amount. So, £36,096 [£10,956 plus £25,140] is subject to basic rate tax, with the balance of taxable income subject to starter, intermediate and 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.
| Pension contribution | Before | After |
| Taxable income | £125,140.00 | £100,000.00 |
| Personal allowance | - | £12,570.00 |
| Employee NI | £6,021.40 | £5,518.60 |
| Employer NI | £16,013.52 | £12,544.20 |
| Tax | £45,876.68 | £30,038.48 |
| Personal contribution (net) | - | - |
| Employer pension contribution | - | £28,609.32 |
| Net income | £73,241.92 | £64,442.92 |
How the numbers work
By using salary exchange, the employer pension contribution is £28,609.32 (employer NI saving of £3,469.32 plus salary exchange of £25,140). Income has reduced by £8,799.00. The difference is £19,810.32, giving an effective tax relief rate of 69% [£19,810.32/£28,609.32 = 69.24%].
Because different tax bands and rates apply in England, Northern Ireland and Wales the effective of tax relief is different, see How to get 60% tax relief on pension contributions for more information.
The figures are based on Scottish income tax and National Insurance rates effective from 6 April 2022.
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.