Yes, it’s entirely possible to get tax relief on pension contributions for high earners. Here’s a quick introduction of the need-to-knows.
High earnings, high taxes
A lucrative salary is the holy grail for many. Yet a high level of income brings with it some brow-furrowing tax implications. And the more you earn, the more complicated things get.
Your personal allowance – the amount of income you are allowed to earn tax-free – is reduced by £1 for every £2 of income above £100,000. If your income is £123,700 or more, your personal allowance will be zero (in the 2018/19 tax year).
That can leave you giving away a lot of your hard-earned income to the taxman. But by making use of your annual pension contribution allowance, you can reduce your tax liabilities significantly while building towards your financial future. Let’s take a look.
Earn tax relief on your pension contributions
The government provides tax incentives to encourage everyone to save into a pension. Essentially, tax relief is provided on your pension contributions at the highest rate of tax you currently pay. Therefore higher-rate taxpayers can obtain 40% pension tax relief, and additional-rate taxpayers can claim 45% pension tax relief.
What does this mean in practice?
Higher-rate (40%) and additional-rate (45%) taxpayers only need to effectively contribute £60 and £55 respectively to achieve £100 worth of pension savings. And because you will have an annual tax-free allowance for pension contributions of somewhere between £10,000 and £40,000, you can save a lot of tax by paying into a pension.
To reclaim the tax on your personal pension contributions, high earners will need to complete a tax return. The pension provider would claim 20% tax within the pension itself, and the additional amount (either 20% or 25%) would be claimed on the tax return. However, if contributions are made by your employer, the contributions will likely be made for you before tax is deducted, therefore there is nothing further to claim within the pension, or on a tax return, as you have already had the effective tax relief. That’s something we can advise you on and help to manage on your behalf. Find out more.
Don’t invest too much into your pension
The tax benefits of paying into a pension fund are clear. But it’s important not to overdo it. Exceeding your personal annual allowance for pension contributions can result in high tax charges, defeating the purpose of diverting income to your pension fund.
>> Tapered annual allowance: examples to simplify your tax
Make your money go further
When you are trying to make the best decisions for your money, it can help to seek the advice of an expert. As a firm with a unique blend of accounting and wealth management expertise, Prydis is well placed to talk you through your options and help you make your money go further. For a free initial consultation – either over the phone or at one of our London or West Country offices – please get in touch.