How can you get 60% or more back from the government by paying into a pension?

Since 6 April 2010, the personal allowance is reduced by £1 for every £2 of income above £100,000. Since then, the personal allowance has almost doubled. It was £6,475 in 2010/11 and now stands at £12,570 in the tax year 2021/22.

Income at this level is formally taxed at 40%. However, the fact that anyone earning over £100,00 has their personal allowance reduced effectively adds another 20%. For each £2 of additional income above £100,000, the personal allowance reduces by £1. At income levels above £125,140, the personal allowance is zero. The increase in the Personal Allowance has effectively widened the 60% tax band.

The definition of’ ‘income’ used by HM Revenue & Customs to calculate the charge is ‘adjusted net income. Any pension contributions made by an individual, whether gross contributions to an occupational pension scheme or gross contributions to a personal pension, will reduce the final amount of adjusted net income.

Where salary exchange is used, the effective rate of tax relief is increased to nearly 67%.

Could you show an example where someone gets 60% tax relief from personal pension contributions?

Keith has an income of £125,140 in 2021/22. He makes a net (relief at source) pension contribution of £20,112 and receives £5,028 tax relief at source. His net income falls by £10,056 in return for a pension contribution of £25,140 – an effective rate of tax relief of 60%.

Could you show an example where someone gets 60% tax relief from salary sacrifice?

Where salary sacrifice is available you can receive even greater benefits. As well as reducing taxable income, a salary reduction will also lower both employee and employer National Insurance contributions. Where your employer is willing to re-invest their National Insurance savings, the effective tax rates can be almost 67%.

If Keith instead were able to make his pension contribution via salary sacrifice, for a net cost of just £9,553 an employer contribution could be made of £28,609.

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