View more on these topics

Contributing factor

The problem: The client has a salary of more than £100,000 and is keen to examine how his pension contributions would affect the reduction in his income tax personal allowance.

The solution
Stephen, who is aged 47, has a net income of £112,500. If he pays a pension contribution of £12,500 gross, then his adjusted net income for personal allowance purposes will be £100,000.
Without a pension contribution Stephen’s personal allowance is £1,855 and taxable income after personal allowance is therefore £110,645. This is taxed as follows:

£34,370 @ 20% = £6,874
£76,275 @ 40% = £30,510
Total income tax = £37,384

Payment of the pension contribution will restore Stephen’s personal allowance to the full £8,105. His taxable income after personal allowances of £104,395 is taxed as follows:

£34,370 @ 20% = £6,874
£12,500 @ 20% = £2,500
£57,525 @ 40% = £23,010
Total income tax = £32,384

Issues to look out for

  • The reduction of personal allowance for income of more than £100,000 a year
  • Using salary sacrifice to make the most efficient pension contribution and offset the loss of the personal allowance

The tax relief on his pension contribution is therefore £2,500 + (£37,384 – £32,384) = £7,500, which equates to an effective rate of 60 per cent.
In the above example, Stephen’s net income after tax, pension contribution and national insurance is as follows:

Income £112,500
Personal pension contribution £(10,000)
Income tax £(32,384)
NI £(5,587)
Net £64,529

If Stephen entered into a salary sacrifice arrangement with his employer, then a higher pension contribution could be made by his employer due to the NI saving as follows.

Income £99,570
Personal pension contribution Nil
Income tax £(29,712)
NI £(5,329)
Net £64,529

Stephen’s reduction in salary from £112,500 to £99,570 means an employer pension contribution of £12,930 could be made.
If the employer also contributed the 13.8 per cent employer NIC saving, then an additional £1,784 could be paid, adding up to a potential employer contribution of £14,714.

Graeme Robb is technical manager at Prudential



Government to launch automatic enrolment TV ads

The Government will run an automatic enrolment TV campaign to raise consumer awareness of the reforms following concerns that the existing adverts have not been effective. In July last year, Money Marketing revealed that the Department for Work and Pensions had secured £11m in additional funding from the Treasury for an awareness campaign. In November, […]


Martin Wheatley to address Aifa gala dinner

Financial Conduct Authority chief executive designate Martin Wheatley will be the keynote speaker at Aifa’s annual gala dinner in November. The FCA will replace the FSA early next year. The dinner is being held on November 18. Aifa policy director Chris Hannant says: “In the final days before implementation of the retail distribution review this […]


Honister latest: Grant Thornton asks advisers to return client files

Honister administrators Grant Thornton have written to former Honister advisers reminding them of their duty to return all client files. Honister entered administration last week after failing to secure professional indemnity insurance. Grant Thornton was appointed as administrator for the group which includes advisory firms Burns Anderson, Sage Financial and Honister Partners. A letter, sent […]

Argonaut looks at developed fund for Bennett

Argonaut is looking at launching a developed market equity fund for manager Greg Bennett. Bennett joined Argonaut as a senior fund manager in January from Marlborough Fund Managers, where he ran the £23m Marlborough UK income and growth fund from 2010 until 2011. He previously worked at Neptune from 2004 to 2005, where he ran […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm