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Earn over £100k? How to Reclaim Your Personal Allowance

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Income Tax and the Personal Allowance

In England, Wales and Northern Ireland (income tax is devolved to the Scottish Parliament and so the rates are different), the income tax rates for the 2019/20 tax year are as follows:

Income Tax Bandings

Up to £12,500
(Your personal allowance)

0%

£12,501-£50,000
(Basic rate)

20%

£50,001-£150,000
(Higher rate)

40%

£150,000+
(Additional rate)

45%

Note that you begin to lose your personal allowance by £1 for every £2 that your adjusted net income is above £100,000, which means your personal allowance is zero if your income is £125,000 or above. It’s here you start to pay a considerable amount of income tax.

What Can I Do to Reclaim My Personal Allowance?

An ‘approved’ method of reclaiming the personal allowance is to make a pension contribution to take your income to below the threshold at which you start to lose your personal allowance.

If possible, the most tax-efficient method for both employer and employee is to have the employer make a contribution on the employee’s behalf.

Exchanging taxable income for a corresponding employer pension contribution allows you to reclaim your personal allowance and make income tax savings at your highest marginal rate.

Try our Pension Tax Relief Calculator below to see how much you could save.

Incomes of £100,000+ Sees Personal Allowance Taper Towards £0

For the tax year 2019/20 the personal allowance is £12,500, above which income tax needs to be paid. As such, those earning £125,000 or more per year have no personal allowance left to use. This means that some people effectively pay almost 60% tax on income between £100,000 and £123,000.

  • For each £2 earned over £100,000, £1 is taken off your allowance, until the allowance reaches £0.
  • If your gross income falls below £100,000 you can reclaim your full personal allowance.
Tax impact of losing your personal allowance for a salary of £126,000

£26,000 x 40% = £10,400.00
(tax paid on £26,000 over the £100,000 limit)

59.2%
Effective Tax Rate
100 x (£15,400/£26,000)

£12,500 x 40% = £5,000.00
(tax paid on revoked personal allowance)

Total = £15,400.00

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Reclaiming Your Personal Allowance

An ‘approved’ method of reclaiming the personal allowance is to arrange with your employer for them to reduce your PAYE salary in exchange for a corresponding employer pension contribution.

Below is an example of someone earning £123,000 who makes no pension contributions. The alternative is for their employer to make a pension contribution of £232,000, and pay a salary of £100,000. This option is known as salary sacrifice or salary exchange.

PAYE Employees with no pension contributions

Employment Income: £123,000

Personal allowance
£1,000*

£75,275.84
Take home (net) pay

Taxable income
£122,000

20% income tax on earnings £0 – £37,500
20% x £37,500 = £7,500

40% income tax on remainder of income
40% x £84,500 = £33,800

Total income tax
£41,300

Employee National Insurance
£6,426.56

*in this example, the client's personal allowance has been tapered by £1 for every £2 of income over £100,000 to £1,000

Reduce income by having the employer make a £23,000 pension contribution

Employment income: £100,000
+ £23,000 employer pension contribution

Personal allowance
£12,500*

£66,533.44
+
£23,000
pension contribution
Take home (net) pay

Taxable income
£87,500

20% income tax on earnings £0 – £32,000
20% x £37,500 = £7,500

40% income tax on remainder of income
40% x £50,000 = £20,000

Total income tax
£27,500

Employee National Insurance
£5,964.16

*client retains full personal allowance thanks to income not exceeding £100,000

In this example, for an employer pension contribution of £23,000, the difference in take home pay is only £8,740. In addition, the employer also saves £2,898 in employer National Insurance contributions, as they don’t need to pay this on employer pension contributions. A generous employer may also pay the amount saved into the pension arrangement.

What to Consider When Reclaiming Your Personal Allowance

This example is based on a salary of £123,000 where an individual loses the majority of their personal allowance, and subsequently reclaims the full allowance by taking a proportion of their salary in an employer pension contribution.

The example does not take into account the individual’s personal circumstances or the need to make retirement provisions, nor does it constitute individual financial advice.

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Tax relief on your pension is one of the most valuable tax breaks available. Follow the simple steps below to calculate how much you could get back in tax relief when you pay into your pension.

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Can Employee Pension Contributions Help Regain the Personal Allowance?

Employee (i.e. personal, not company-sponsored) pension contributions can also be used to reclaim at least some of the personal allowance. However, these contributions do not benefit from the employer and employee National Insurance savings.

Employee pension contributions are paid out of post-tax income, meaning income tax and National Insurance contributions have already been deducted on the cash the employee is investing in the pension.

Although making the personal pension contribution still allows the employee to reclaim their personal allowance, it isn’t possible for either the employer or employee to obtain relief on the National Insurance contributions already paid on the sum the employee decides to invest into their pension.

If you’re a higher-rate taxpayer, you’ll also have to apply for your additional 20% tax relief on the pension contribution by applying to HMRC using a self-assessment tax return.

Moreover, an employer can apply for corporation tax relief as a business expense on pension contributions they make on behalf of their employees, as well as not having to pay National Insurance contributions on the sum invested into a pension. This is because employer pension contributions aren’t PAYE income that goes through payroll.

So while the employee can make pension contributions out of their post-tax income and reclaim their personal allowance, it isn’t as tax efficient for either party as having the employer make the contribution.

Dividend Receiving Directors and the Personal Allowance

This example is based on a director of their own company remunerating themselves with a fairly small salary (£23,000) and the bulk of their income made up of dividends (£100,000).

The individual is a higher rate taxpayer and therefore pays a higher rate of tax on their dividends. Also, as their income is over £100,000, their personal allowance has been reduced to £1,000.

Gross income: £123,000

Gross dividend income: £100,000

Gross PAYE salary: £23,000

Dividend allowance
£2,000

Personal allowance
£1,000*

Taxable dividend income
£98,000

Taxable PAYE income
£22,000

Dividend tax
£31,850

20% income tax on earnings £0-£32,000
20% x £23,000 = £4,600

Total dividend tax
£31,850

Employee NI contributions
£1,982.78

 Take home (net) pay: £84,567.22
*client only retains £1,000 of personal allowance due to tapering by £1 for every £2 of income over £100,000

Make a £23,000 employer pension contribution.

The individual is a higher rate taxpayer, but their personal allowance has not been reduced as they are putting £23,000 into a pension.

Gross income: £100,000
+ £23,000 employer pension contribution

Gross dividend: £77,000

Gross PAYE salary: £23,000

Dividend allowance
£2,000

Personal allowance
£12,500*

Taxable dividend income
£75,000

Taxable income
£10,500

Dividend tax
£25,025

20% income tax on earnings
£0 – £32,000
20% x £10,500 = £2,100

Total dividend tax
£25,025

Employee NI contributions
£1,982.78

Take home (net) pay: £70,892.22
+
Pension contribution: £23,000 
*client retains full personal allowance thanks to income not exceeding £100,000

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