Tax Relief on Pensions
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%.
- A pension contribution for people earning between £100,000 and £123,000 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 20% tax on that income too.
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.
A simple way of looking at this is that by sacrificing £23,700 into a pension the salary reduces by just £8,006.