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 contributionWith £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.


George Laingchild PJCO Peter Jarman
George Laingchild

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