High earners could benefit from investing in a pension. The tax relief makes pensions a tax-efficient way to invest for later in life. However, high earners need to be aware of how their income and tax band can affect the amount they can contribute and the potential amount of tax relief they can claim.
1. How much can I contribute to my pension if I’m a high earner?
- You can make pension contributions up to 100% of your yearly earnings or up to the annual allowance of £40,000, whichever is lower. However, if you’re a high earner, and your adjusted income is more than £240,000 a year, the tax relief you can get on contributions is limited to a reduced annual allowance, known as the tapered annual allowance
2. Tapered annual allowance
- If your threshold income is more than £200,000 and your adjusted income is more than £240,000, your annual allowance for that tax year will be tapered. A tapered allowance reduces proportionally according to your earnings.
3. Tax relief on pension contributions for high earners
- For most people, pension tax relief comes in the form of government top-ups on any contributions made equivalent to their income for the year, up to the annual allowance of £40,000.
- Everybody is entitled to claim the basic 20% tax relief on their contributions. However, because the amount of tax relief you get is linked to the highest band of income tax you pay, higher-rate and additional-rate taxpayers are able to claim extra tax relief on top of the basic 20%. Higher-rate taxpayers can claim a further 20%, while additional-rate taxpayers can claim an extra 25%.
- Don’t miss out on these benefits, make sure you claim the additional relief through your tax return.
4. Carry forward for high earners
- You can carry forward any unused annual allowance from the previous three tax years, even if in this year you’ve got a tapered annual allowance
- If you have unused annual allowance from a previous year in which you’ve had a tapered allowance, you can only carry forward an unused amount up to the tapered allowance
- Your gross earnings for the current tax year must cover your entire pension contribution, including the carry forward contribution.
5. How do I work out if I have a tapered allowance?
- To find out if you have a reduced annual allowance for the tax year, you need to work out your threshold income and adjusted income.
- If your threshold income for the year is £200,000 or less, your annual allowance won’t be reduced.
- If your threshold income is more than £200,000, you need to work out if your adjusted income is more than £240,000 to see if your annual allowance is affected.
If you’re a high earner but you’re not sure whether the tapered annual allowance applies to you, you may want to speak to a Financial adviser.
