60% Pensions relief
Since 6th April 2010, high-income individuals (earnings between £100,000 and £125,000) have been required to forfeit their personal allowance by £1 for every £2 of income earned above £100,000. This means that once an individual’s adjusted net income is above £125,000, the personal allowance of £12,500 (19/20) will have been reduced to nil.
Does this affect you?
Then making a pension contribution can help to reduce your adjusted net income to protect your personal allowance, resulting in tax relief of 60%. This is due to the effective rate of tax for income between £100,000 and £125,000 being 60%. As in addition to paying 40% tax on any income above £100,000, there is the negative impact of abating the personal allowance and paying 40% on that also.
HMRC use what is called the “adjust net income” to determine any reduction in the personal allowance.
When you make a pensions contribution, whether it be a gross contribution to an occupational pension scheme or gross contribution to a private personal pension, this contribution will reduce your adjusted net income figure.
The following example details how a gross pensions contribution of £25,000 will affect an individual with a salary of £125,000.
| Without £25,000 contribution | With £25,000 contribution | |
| Taxable income | £125,000 | £125,000 |
| Pensions contribution (Net) | £0 | £20,000 |
| Personal allowance | £0 | £12,500 |
| Income Tax charged | £42,500 | £32,500 |
| Net income | £82,000 | £72,500 |
Calculation explained:
Therefore, a pensions contribution of £25,000 (inc. basic tax relief) only results in a reduction of net income after tax of £10,000. The difference is, therefore, £15,000, which gives you effective tax relief of 60%. (15,000/25,000=60%)
As the gross pensions contribution of £25,000 extends the basic rate tax bracket by the same amount. Now only £50,000 is being subject to the higher rates of tax, rather than £87,500 previously.
Please get in contact on 01273 441 187 if you would like to discuss this further.
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