Drewberry™ provide pensions, investment and insurance advice for Money to the Masses readers throughout the UK.

final salary pension transfer

Earn over £100k? How to reclaim your Personal Allowance

As a result of rules introduced in April 2010, you start to lose part of your personal Income Tax allowance once you start earning over £100,000.

  • An ‘approved’ method of reclaiming the personal allowance is to make a pension contribution
  • The most tax-efficient method for both employer and employee is to have the employer make a contribution on the employee’s behalf, but an employee pension contribution can be used in a similar way although with less of a tax advantage.
  • Lowering your taxable income in exchange for a corresponding employer pension contribution allows you to reclaim your personal allowance and make Income Tax savings at your highest marginal rate.
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Below we have put together a number of worked examples to help provide an overview of what is possible and where the savings lie.

We know from experience that each persons circumstances are different so if you would like a personal recommendation then please don’t hesitate to give us a call on 02084327333 or email help@drewberry.co.uk.

Neil Adams
Pension & Investment Specialist

Income over £100,000 sees personal allowance tapering towards £0

  • 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
  • For the tax year 2017/18 the personal allowance is £11,500, above which income tax needs to be paid
  • Those earning £123,000 or more per year therefore 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.

When calculating income for taxable purposes, other income and benefits in kind such as a company car should all be taken into account.

Tax impact of losing your personal allowance for a salary of £123,000
£23,000 x 40% = £9,200.00

(tax paid on £23,000 over the £100,000 limit)

 
59.1%
Effective Tax Rate
100 x (£13,600/£23,000)
£11,500 x 40% = £4,600.00

(tax paid on revoked personal allowance)

Total = £13,600.00
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tax relief through pension contributions

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. While an employee pension contribution can be used to similar effect, it doesn’t offer the same tax and National Insurance savings for either employer or employee (see below).

Below is an example of someone earning £121,000 who makes no pension contributions. The alternative is for their employer to make a pension contribution of £20,000, and pay a salary of £101,000. This option is known as salary sacrifice or salary exchange.

 

PAYE Employees

Example: No pension contributions

Employment income: £121,000
Personal allowance
£1,000*
 
£73,776.48
Take home (net) pay
Taxable income
£120,000
20% income tax on earnings £0-£33,500
20% x £33,500 = £6,700
40% income tax on remainder of income
40% x £86,500 = £34,600
Total income tax
£41,300
Employee National Insurance
£5,923.52
*in this example, the client's personal allowance has been tapered by £1 for every £2 of income over £100,000 to £1,000

Example: Reduce income by having employer make £20,000 pension contribution

£100,000 employment income £21,000 employer pension contribution
Personal allowance
£11,500*
 
£65,776.48
+
£21,000
pension contribution
Take home (net) pay
Taxable income
£88,500
20% income tax on earnings £0-£32,000
20% x £33,500 = £6,700
40% income tax on remainder of income
40% x £55,000 = £22,000
Total income tax
£28,700
Employee National Insurance
£5,523.52
*client retains full personal allowance thanks to income not exceeding £100,000

In this example, for an employer pension contribution of £21,000, the difference in take home pay is only £8,00. 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.

 

Things to consider when reclaiming your personal allowance

This example is based on a salary of £121,000 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 financial advice.

Try our 2017 Pension Tax Relief Calculator below to see how much you could save…

 

Pension Tax Relief Calculator

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.
£
£
The pension contributions you have stated are greater than the total pension contributions you will receive tax relief on of .
As a non-tax-payer the maximum pension contributions you can make is £3,600, a £2,880 net contribution + the governments 20% tax relief.

Your Pension Tax Relief Result

Pension tax relief means only a proportion of your desired pension contribution will have to come out of your own pocket ('Net Pension Contribution'). The remainder is topped up by the government in the form of tax relief to form your total 'gross' pension contribution. Below we've calculated how much you'll have to pay into your pension to receive a government top-up that will equal your desired total gross contribution this tax year.

20% Tax Relief Added at Source

The government automatically adds 20% tax relief to pension contributions within your annual allowance.


Get More For Your Money Through Your Tax Return

As you're a higher rate (40%) taxpayer, you can reclaim additional pension tax relief through your tax return. The government automatically adds basic rate (20%) tax relief to all pension contributions at the source. The remaining tax relief is reclaimed through your tax return.

As you're an additional (45%) taxpayer, you can reclaim additional pension tax relief through your tax return. The government automatically adds basic rate (20%) tax relief to all pension contributions at the source. The remaining tax relief is reclaimed through your tax return and may be made up of a combination of additional rate tax relief and reclaimed income tax personal allowance.


How this calculator works...

Drewberry has calculated the tax relief you may be able to receive based on you being a 0% taxpayer, a basic rate (20%) taxpayer, a higher (40%) taxpayer or an additional (45%) taxpayer in the 2017/18 tax year.

We've also calculated the benefit to you based on the fact that you may regain some of your lost income tax personal allowance by making pension contributions if you earn between £100,000 and £123,000. However, there are many other factors that may affect your eligibility for tax relief on your pension contributions, including your age – for example, tax relief on pension contributions stops once you reach the age of 75.

Neil Adams - Final Salary Pension Expert

These calculators help but sometimes it doesn't beat talking to a human. If you need any support please do not hesitate to pop us a call on 02084327333.

Neil Adams
Head of Pensions Advice at Drewberry

 

Do employee pension contributions help you reclaim your personal allowance?

Employee 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.

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Dividend receiving Directors

Example: Dividend income of £100,000 + PAYE salary of £21,000. No pension contributions.

This example is based on a director of their own company remunerating themselves with a small salary and the bulk of their income made up of dividends. 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: £121,000

Gross dividend income: £100,000

Gross PAYE salary: £21,000

Dividend allowance
£5,000
Personal allowance
£1,000*
Taxable dividend income
£95,000
Taxable PAYE income
£20,000
Dividend tax
£28,750
20% income tax on earnings £0-£32,000
20% x £20,000 = £4,000
Total dividend tax
£28,750
Employee NI contributions
£1,540.32
 
 Take home (net) pay: £86,817.20
*client only retains £1,000 of personal allowance due to tapering by £1 for every £2 of income over £100,000

Example: £21,000 employer pension contribution

The individual is a higher rate taxpayer, but their personal allowance has not been reduced as they are putting £21,000 into a pension.

Gross income: £100,000 + £21,000 employer pension contribution

Gross dividend: £80,000

Gross PAYE salary: £20,000

Dividend allowance
£5,000
Personal allowance
£11,500*
Taxable dividend income
£75,000
Taxable income
£9,500
Dividend tax
£19,375
20% income tax on earnings £0-£32,000
20% x £9,500 = £1,900
Total dividend tax
£19,375
Employee NI contributions
£1,420.32
 
Take home (net) pay: £77,304.68
+
£21,000 
pension contribution
*client retains full personal allowance thanks to income not exceeding £100,000

Key considerations for directors receiving dividends

For an employer pension contribution of £20,000, the difference in take home pay is only £9,000.

Whereas an individual would have lost the majority of their personal allowance had they had a dividend payment of £100,000 and a PAYE salary of £20,000, they reclaim all of their personal allowance by having their company make a £20,000 employer pension contribution. This immediately saves £2,000 in income tax.

While employee pension contributions can also reclaim some of the revoked personal allowance, employee contributions are paid out of the employee’s net or post-tax income. The tax relief is applied at the basic level and tax relief at the additional level must be claimed by notifying HMRC or completing a self-assessment tax form.

Employee pension contributions also don’t benefit from employer and employee National Insurance savings.

The above examples do not take into account the individual’s personal circumstances or the need to make retirement provisions, nor do they constitute financial advice.

Annual Allowance Pension Advice

Pensions Advice – Need some help?

We have a team of professional pensions adviser who will be able to advise you and guide you through the process of making the most of your income when planning for retirement. If you would like to discuss your pension options you can contact us directly on 020 8432 7333 or email help@drewberry.co.uk.

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