While the highest headline marginal income tax rate in England and Wales is 45%, high earners can have an effective tax rate of 60%.
For every pound earned over £100,000, your personal allowance (of £12,570) is reduced at a rate of £1 for every £2 earned. In effect putting your marginal rate between £100,000 and £125,140 at 60%. For every £1,000 contributed into a pension in this income bracket, your pension goes up by £2,500!
Here is an example on a £25,000 contribution for someone earning £125,000/year:
|Gross pension contribution
|Adjusted net income
|Income tax liability
How much can you contribute?
Income tax relief on pension contributions is limited to lower of your earnings or £40,000 (The Pension Annual Allowance). You can also ‘carry forward’ any unused annual allowances from the previous 3 years. This means it may be possible to contribute up to £160,000 in a single year in certain circumstances.
Tapered Annual Allowance
Special rules apply to earners with an ‘adjusted net income’ over £240,000 that reduce the annual allowance.
Money Purchase Annual Allowance
Special rules also apply to individuals that have ‘flexibly’ accessed their pensions that impact both their annual allowance and ‘carry forward’.
You can generally only access your pension savings from the age of 55 (age 57 from 2028).
Pensions Lifetime Allowance (LTA)
There is a maximum that can be accumulated into you pension without incurring an additional tax charge. The LTA currently stands at £1,073,100 and is frozen at this level until the end of the 2025/26 tax year. We have written an article on the LTA freeze here:
Taxation Of Pension Income
25% of your pension can usually be tax-free with the balance taxed at your marginal tax rate at the time of withdrawal.
Please get in touch to discuss whether a pension lump-sum contribution makes sense for you on 0207 097 4968 or email@example.com.
Pensions are long-term investments, the value of your investment and the income from it may go down as well as up.
Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
Past performance is not a reliable indicator of future performance.
This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
Levels and bases of, and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.