Granite guidance

60% Income Tax Relief?

Many are aware that a personal pension contribution attracts 20% tax relief when paid, and potentially a further 20% or 25% for higher earners. For a minority of individuals, though, the available tax relief will be as high as 60% - and without the need to resort to 'clever' tax planning. The other side of the coin is that some won't be entitled to tax relief on all of their contributions at their top rate of tax. 

A personal contribution made to a personal or stakeholder pension will usually be paid net of 20% tax relief. An individual pays 80% of the total contribution; the Government adds the remainder. This can be done each tax year up to 100% of earnings, although annual allowance restrictions may apply.

Higher earners can claim an additional 20% or 25% through their tax return or by an in-year adjustment to their tax code. Either way, this additional relief is returned to the client rather than paid to their pension.  The mechanism by which the additional relief is calculated is an increase in the basic rate tax band of the value of gross contributions. For example, the basic rate tax band – which sits 'above' the personal allowance - is £32,000 in the 2016/2017 tax year. A gross contribution of £10,000, say, increases the band to £42,000. The effect of this is to tax £10,000 of income at 20% instead of 40%, generating the additional 20% relief due.

A further benefit of personal contributions is that they reduce the client's 'adjusted net income'. Adjusted net income above £100,000 causes the gradual loss of the personal allowance at a rate of £1 for every £2 of excess income. Taxable income of £110,000, then, reduces the personal allowance by £5,000 – from £11,000 to £6,000. A personal contribution of £10,000 gross would, in this instance, restore the personal allowance.

This is the source of 60% tax relief:

  • 20% tax relief available when the contribution is paid to the provider;
  • an additional 20% tax relief through self assessment for higher rate taxpayers; and
  • a further 20% tax relief for those clients who can restore some or all of their personal allowance

Those in this position – those with taxable income between £100,000 and £122,000 – should be encouraged to make a personal contribution, provided that it is affordable and the annual allowance implications have been checked.

That's one very positive aspect of tax relief. Another that should be highlighted is the limitation of tax relief at the higher rates. A 40% or 45% taxpayer is not automatically entitled to this much tax relief on all of their personal contributions. Instead, it is limited to the amount of tax paid at those rates. Income in the year of £45,000 currently breaches the higher rate tax threshold by £2,000, so only that amount suffers 40% tax. Consequently, a contribution of, say, £20,000 attracts basic rate relief on the full contribution, but only £2,000 attracts higher rate relief.

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The general financial planning guidance provided in this website is based on our understanding of current law and HM Revenue & Customs practice, which are subject to change in the future. Whilst every effort is made to ensure the content of this website is correct, it does not constitute personal financial advice and Granite Financial Planning Ltd cannot accept any responsibility for it. There is a risk that investment returns may not achieve the desired result. Investments can go down as well as up. The Financial Ombudsman Service (FOS) is an agency for arbitrating on unresolved complaints between regulated firms and their clients. Full details of the FOS can be found on its website at Cookies are used on this website to record visitor numbers for analytics purposes.