If you earn between £100,000 and £120,000 you need to read this

Pound coins stacking up to depict someone who plans to boost your finances and protect against pension liberation fraud


Julie Hutchison

24th February 2015 at 10:26am

There’s still time to make the most of your tax allowances before the tax year ends on 5th April.

If your income is between £100,000 and £120,000, and you were born after 5th April 1948, did you know that paying into a pension could boost your finances in three immediate ways?

Here’s how.

It’s all down to the way HM Revenue and Customs defines ‘adjusted net income’. That is your total income minus certain tax reliefs, such as Gift Aid donations and pension contributions.

Let’s assume you have income of £120,000 in tax year 2014/15 and you decide to pay £16,000 into your personal pension. *1 Three consequences for your finances are :

  1. £16,000 becomes £20,000 paid into your pension, because of the 20% tax relief top-up from the government.
  2. You get your income tax personal allowance of £10,000 back, because your ‘adjusted net income’ is now £100,000 rather than £120,000. This means you now have a band of tax-free income and less tax is due at your top rate (40% in this example). Without the pension contribution, you would have no personal allowance as you lose it entirely once your income hits £120,000.
  3. If you claim higher rate tax relief by filing a tax return, you can get a refund of £4,000 of tax since your basic rate band is expanded by the gross amount of your pension contribution. In other words, an extra £20,000 of your income is taxed at 20% instead of 40% in this example.

Before and after

So what’s the overall effect of paying into a pension here? (To keep the numbers easy, I’ve ignored National Insurance).

National Insurance).




Take home




Income tax paid




Pension savings



£20,000 *

*includes the 20% tax relief added

Although the take-home figure has gone down by £12,000, in return you have £20,000 which now sits in your pension – not a bad deal, you might say. It’s effectively 60% tax relief. And remember, you can start to access your pension savings from age 55, so your money isn’t locked away forever.

Losing your personal allowance

Your personal allowance of £10,000 is gradually withdrawn once your income hits £100,000, and disappears once you have income of £120,000. It reduces by £1 for every £2 of income you have over £100,000.

Whether paying into a pension is right for you depends on your circumstances. If you are likely to need access to your savings before the age of 55, then a pension won’t give you that kind of access. But if you’re wanting to save for the long term, and benefit from higher rate tax relief which still exists today, it might be worth looking at how a pension contribution could have a positive impact on your finances before 5th April 2015.


*1 This assumes that you have a salary or self-employment income of at least £20,000 to cover the contribution you’re making to your pension

*2 Tax of £6,373 due on 20% band of £31,865. Tax of £35,254 due at 40% rate on £88,135

*3 First £10,000 tax-free. Next £51,865 at 20%, ie. £10,373. Remaining £58,135 at 40%, which is £23,254


This blog was updated on 25th February 2015.

This blog and any responses to comments are not financial advice. A pension is an investment. Its value can go up and down and it may be worth less than you paid in. Tax and legislation can change in the future and this blog reflects our understanding of the rules as at February 2015.

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