Reducing CGT via a relief at source pension contribution

If a person living in England, were to make an £8,000 net contribution which is then grossed up to £10,000 within the scheme, the basic rate band increases from £37,700 to £47,700. As a result £10,000 more income would then be taxed at 20% rather than being taxed at the higher rate of 40%.

The relief at source gross contribution would also reduce the adjusted net income, which may help clients regain some or all of their personal allowance or reduce a high‑income child benefit charge.

Income: £45,270

The higher rate tax band starts at £50,270 which means the remaining amount of the basic rate tax band is £5,000.

Capital gain: £10,000

CGT calculation with no pension contribution

• £5,000 x 18% = £900
• £5,000 x 24% = £1,200
• Total CGT = £2,100

Personal contribution: £4,000 net/£5,000 gross

This extends the basic rate tax band by £5,000, so the higher rate tax band now starts at £55,270. With income of £45,270 the remaining basic rate tax band becomes £10,000.

CGT calculation after the pension contribution

• £10,000 x 18% = £1,800

Tax saving

• Before contribution: £2,100
• After contribution: £1,800
• Saving = £300

Income: £110,000

At this income level the personal allowance is reduced.
For every £2 of income above £100,000, £1 of personal allowance is lost.
Income above the threshold: £10,000
Reduction: £10,000 ÷ 2 = £5,000
Remaining personal allowance: £12,570 − £5,000 = £7,570

Capital gain: £30,000

Because the client is already within the higher rate tax band and has reduced personal allowance, the gain is fully taxed at higher CGT rates.

CGT calculation with no pension contribution

• £30,000 x 24% = £7,200

Personal contribution: £72,000 net/£90,000 gross

This contribution extends the basic rate band by £90,000.

It also reduces the adjusted net income from £110,000 to £20,000, which is well below the £100,000 threshold, so the full £12,570 personal allowance is restored. Meaning the £5,000 will now be tax at 20% instead of 40%.

The restoration of the personal allowance means the higher rate threshold now sits at £140,270 (£12,570 plus £37,700 plus £90,000). For someone with income of £110,000, the remaining portion of the basic rate band is £30,270 (£140,270 minus £110,000).

CGT calculation after the pension contribution

• £30,000 x 18% = £9,000

Tax saving

• Before contribution: £7,200
• After contribution: £5,400
• Income tax saving due to restoration of personal allowance: £1,000 (£5,000 x 20%
• Saving = £2,800

Higher rate tax relief of £18,000 will also be able to be reclaimed via self-assessment. This example assumes that the client has sufficient annual allowance and carry forward to be able to make this contribution.