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Tax Relief on Pension Contributions

57Pensions often get bad press but, if you look beneath the headlines you will see some very generous tax advantages and pension tax relief.Pensions often get bad press but, if you look beneath the headlines you will see some very generous tax advantages and pension tax relief.

In brief, pension contributions qualify for tax relief on up to £3,600 or 100% of relevant UK earnings, whichever is the higher, up to a maximum of £40,000 per year, although carry-forward relief is also available.

Tax relief is normally given at source, for example, you might make a contribution to your employer scheme directly from net pay (after tax & NI), known as “relief at source”. If you contributed say, £500 (per month) the pension provider will add basic rate tax relief of £125, making a total gross contribution of £625.This is fine, if you are a basic rate taxpayer, but what if you have earnings subject to higher rate tax (above £46,350 tax year 2018/19)?

You can actually  claim an additional 20% tax relief on contributions in respect of earnings above the higher rate tax threshold. Here’s an example -

Liz earns £55,000 per annum.
She contributes £500 per month net to her employer scheme which, when basic rate tax relief is added, equates to a gross contribution of £625 per month (as above). 
Therefore annual gross contribution is £7,500. 
At this level the contribution falls within the higher rate bracket (earnings above £46,350) which means that Liz is entitled to 40% tax relief. The provider has already claimed 20% relief at source, Liz therefore needs to claim the additional 20% via her self-assessment tax return, or simply write to her tax office. 
This effectively means Liz’s total annual pension contribution of £7,500 has cost her only £4,500.


This is common place, where employees don’t realise they have to contact HMRC to claim higher rate tax relief themselves. If you think this is you then it may still be possible to claim. You can go back four tax years after the end of the tax year for which you are claiming.

So far, so good. But tax relief on pension contributions for high earners is gets even better.

How to get 60%Tax Relief“

Is it true what I read, can you really get 60% Tax Relief on pension contributions?” Well actually it is, and this is how it works –

Firstly, this only applies to people with a minimum of £100,000 relevant UK earnings. Your personal allowance (£11,850 tax year 2018/19) is reduced by £1 for every £2 of income above £100,000. This means that when income reaches £123,700p.a, the personal allowance effectively disappears.

This gives an effective tax rate on income between £100,000 and £123,700 of 60% (Ouch!).

However, all is not lost. It is possible to effectively restore your personal allowance and claim back tax relief. This is how it works –

Bob has taxable income of £123,700 per annum and currently doesn’t contribute to a pension.
Taxable Income £123,700.00
Personal Allowance £ nil
Tax & NI £ 48,678.80
Net Income £ 75,022
What if Bob were to make a net pension contribution of £18,960 (£23,700 gross)?
Pension contributions are effectively deducted from gross income when calculating Taxable Income (known as Adjusted Net Income). Therefore this reduces national income down to £100,000, thereby restoring the full personal allowance.
Taxable Income £123,700
Personal Allowance £ 11,850
Tax & NI £ 39,198
Pension Contribution £18,960
Net Income £ 65,542
By regaining his full personal allowance, Bob has reduced his tax liability by £9,480. He also receives tax relief at source of £4,740 on his £23,700 pension contribution. 
Therefore, Bob’s total saving is £14,220, equivalent to 60%.

If you think this might affect you or would like to discuss Tax Relief on Pension Contributions in more details, then please feel free to call Liz or Kelly in the office to discuss further. 01608 651608 or fill in our enquiry form and we will come back to you.