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

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

For the tax year 2023/24 the personal allowance is £12,570, above which income tax needs to be paid. As such, those earning £125,140 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.

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 £23,000 and pay a salary of £100,000. This option is known as salary sacrifice or salary exchange.

PAYE Employees With No Pension Contributions

Reduce Income By Having The Employer Make A £23,000 Pension Contribution

In addition, the employer also on 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.

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.

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.

Your Financial Plan – Build A Better Future

A good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.

Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey

Why Speak to Us…

We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as planning our finances. Below are just a few reasons why it makes sense to let us help.

• See your financial future
  We use sophisticated financial modelling technology to visually show you your financial future. A living financial plan where you can clearly see what you can achieve depending on the decisions you make – read more
• Achieve the retirement you deserve
  Can afford that dream round-the-world trip? Can you help your children onto the property ladder? We’ll model your goals and build your financial plan to help you achieve them.
• Our expertise saves you time and provides peace of mind
  Organising your pensions, investing your assets, managing risk and making the most of your tax allowances is all taken care of as part of your financial plan.
• We’ve got bargaining power on our side
  This allows us to negotiate better rates for you than dealing with providers yourself.
• You’ll speak to a dedicated expert from start to finish
  You will speak to a named expert with a direct telephone and email. No more automated machines and no more being sent from pillar to post – you’ll have someone to speak to who knows you.
• Benefit from our 5-star service
  We pride ourselves on providing a 5-star service, as can be seen from our 2386 and growing independent client reviews rating us at 4.92 / 5.
• Gain the protection of regulated advice
  You are protected. Where we provide a regulated advice service we are responsible for the decisions we help you make. Doing it yourself or going direct to a provider won’t provide this protection, so you won’t benefit from these securities.