- Using pension contributions can help clients regain some or all of their personal allowance.
- The approach may also work where income arises from collectives, investment bonds, or where clients face the High‑Income Child Benefit Charge.
- It is only personal contributions to a relief at source scheme that reduce the adjusted net income.
Key takeaways
1. What is the personal allowance reduction?
Since 2010/11, individuals with adjusted net income over £100,000 have their personal allowance reduced at a rate of £1 for every £2 over that threshold.
With today’s allowance levels, a client with income above £125,140 loses their personal allowance entirely.
This is important for advisers working with high‑earning clients or those with material taxable gains.
2. How losing the personal allowance increases tax
When assessing income tax, clients normally start with their personal allowance, then move through the basic‑rate band and on to the higher‑rate band. If the allowance is removed, an extra £12,570 becomes taxable at the client’s highest marginal rate.
For example, a client earning £125,140:
- With a personal allowance, the total tax payable would be £37,488.
Income - £125,140
£12,570 – No tax
£37,700 – 20% tax equates to £7,540
£74,870 – 40% tax equates to £29,948
Total tax - £37,488
- Without it, the tax rises to £42,516.
Income - £125,140
£37,700 - 20% tax equates to £7,540
£87,440 – 40% tax equates to £34,976 (additional £12,700 now in this tax bracket)
Total tax - £42,516
The loss of the allowance therefore increases tax by £5,028 – effectively 40% of the lost personal allowance.
3. Using pension contributions to restore the allowance
The adjusted net income is reduced by personal contributions into a relief at source scheme. For example, someone paying £8,000 net into a relief at source scheme gets £2,000 tax relief added to their pension, bringing the total gross contribution to £10,000. The adjusted net income is reduced by this £10,000.
The tax bands are also extended by the gross contribution, thereby providing an extra tax relief due. In order for this to happen you have to actually make a claim for this tax relief via your self-assessment. The mechanism for the tax relief will either be an adjustment to your tax code or an offsetting against other income which may then lead to a refund.
This can help clients reclaim part or all of their lost personal allowance and avoid paying income tax at 60% (the effective rate created in the taper zone).
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Adjusted net income £125,140 |
Income of £125,140, pension |
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40% tax |
40% tax |
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20% tax |
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20% tax |
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Personal allowance £12,570 |
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5. Other benefits
Pension contributions do more than simply help restore the personal allowance, although that is typically the most notable benefit. The same mechanism can also create valuable opportunities in other areas of financial planning.
Chargeable gains and Capital Gains Tax
Extending the personal allowance can also have positive effects when calculating chargeable gains on investment bonds or capital gains on collective investments. The pension contribution that helps reinstate the personal allowance also increases the basic rate tax band for both bond top‑slicing and CGT purposes.
This means a well‑timed pension contribution could reduce the applicable tax rates — for example, from 40% to 20% on bond gains, and from 24% to 18% on CGT (rates for the 2026/27 tax year).
High‑income Child Benefit Charge
If you or your partner earn more than £60,000 your will need to repay some or all of your Child Benefit. Once you or your partner earn over £80,000 you will need to repay all of your Child Benefit. As with the personal allowance, a personal pension contribution paid using the relief‑at‑source method can also bring adjusted net income below the £60,000 - £80,000 threshold. Doing so can reduce or eliminate the High‑income Child Benefit Charge.
The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.