60% income tax relief on pension contributions

Sometimes the simple ideas are the most effective and this is certainly the case when an individual earns over £100,000 and wishes to minimise the impact of the loss of their personal allowances.

The basic personal allowance for 2011/12 is £7,475. However, where an individual’s “adjusted net income” exceeds £100,000 the personal allowance is reduced by ½ the excess.

Adjusted net income is

  • total income subject to income tax, less
  • specified deductions (trading  losses and gross payments to pension schemes), less
  • deduction for pension contributions and gift aid payments, paid of basic rate income tax.

For example if an individual has net income of £105,000 his personal allowance will be restricted by ½ x £5,000, giving a net personal allowance of £4,975. This means that the marginal rate of income tax on the top slice of £5,000 is 60%.

If the individual makes net pension contributions of £4,000 (£5,000 gross), his adjusted net income will be £100,000, so there will be no restriction to the personal allowance. The net cost of making a gross contribution of £5,000 will therefore be £2,000.

Pension contributions and gift aid payments should not be overlooked as part of year end planning, particularly where relief would be due against net income of between £100,000 and £114,950.

For further information please call TaxDesk on 0845 4900 509 and ask for Paul Howard.