Pension planning for high earners

Here, we explore the key pension tax planning opportunities for high earners.

Tax relief

When paying money into a registered pension scheme tax relief is available by extending the basic rate and higher rate tax bands. The tax bands are extended by the gross amount of the pension contribution. Therefore, if an individual pays £800 into a pension scheme the basic and higher rate thresholds are extended by £1,000 each (£800 x 100 / 80).

In addition, payments to a pension scheme are made net of 20% tax. Therefore, if an individual pays £800 into a pension pot HMRC will make up the difference of £200.

The maximum contribution that can be made into a pension fund which an individual can obtain tax relief for in a tax year is 100% of their relevant earnings in that tax year. However, anyone can pay up to £3,600 gross per year irrespective of their level of earnings.

Relevant earnings are made up of:

• Employment income, including taxable benefits in kind
• Trading income, i.e. self-employment and partnership
• Furnished holiday letting profits
• Patent income
• It is worth noting that the relevant earnings restriction does not apply to employer contributions.

Annual Allowance

The annual allowance is the maximum that can be input into a pension scheme in any tax year. For 2023/2024 this is £60,000 gross. Any unused allowances from the previous three years may be utilised as well. This is calculated on a first in first out basis once the current year allowance has been utilised in full. However, an individual can only utilise brought-forward allowances if they were a member of a registered pension scheme in those years. If the amount input exceeds the available allowances, then the annual allowance charge will apply.

Tapered Annual Allowance & Annual Allowance Charge

The Annual Allowance may be tapered if you are a high earner. An individual is a high earner if their ‘threshold income’ is over £200,000 and their ‘adjusted income’ is over £260,000. Between 6 April 2020 and 5 April 2023, adjusted income was £240,000. Between 6 April 2016 and 5 April 2020, the threshold income limit was £110,000 and adjusted income was £150,000.

If the thresholds are exceeded the Annual Allowance will be tapered by £1 for every £2 of adjusted income in excess of the adjusted income threshold. The tapered allowance cannot be reduced below £10,000, (£4,000 between 6 April 2020 and 5 April 2023 and £10,000 prior to). When the pension input exceeds the available annual allowance, the excess will be subject to income tax. This will be deemed to be an individual’s top slice of income and therefore will be taxed at their marginal rate. This means that a higher earner may opt to restrict their contributions up to £10,000 instead in order to avoid the tax charge. For higher earners whose employer makes pension contributions on their behalf as part of their remuneration package, it should be worth noting that even though this may exceed the annual allowance and trigger an income tax charge at their marginal tax rate of 40%/45%, the employee still benefits from an uplift in their pension fund from the net employer’s contribution of 60%/55%. As such, it is important to consider your circumstances carefully and obtain specialist tax advice when reviewing the potential impact of employer contributions that may result in an exposure to the pension savings tax charge.

Threshold income

Threshold income is net income less the gross amount of personal pension contributions where basic tax relief has been given at source (generally where payments are made into a SIPP).

Adjusted income

Adjusted income is the net income plus gross pension contributions made via salary sacrifice and the amount of pension contributions made by the employer.

Lifetime allowance

The lifetime allowance charge has been abolished from 6 April 2023.

Planning points

Making pension contributions can mitigate the loss of Personal Allowances where an individual’s income is in excess of £100,000.

Additionally, another planning point is the use of pension contributions made via salary sacrifice. This will save tax and National Insurance Contributions which would have been typically due on an individual’s gross income. Some employers may often be willing to contribute the savings on National Insurance into the pension pot.

Anyone can contribute to someone else’s pension too, for example, a spouse or family member. As this could be rather complex and intricate, please contact us if you want to find out more.

If you would like further advice on anything we have covered in this article, please get in touch with the tax team today.