Avoiding tax traps – achieving 60% tax relief with pensions

By reclaiming the personal allowance, high earners may obtain effective tax relief of 60% when making a personal pension contribution, says NW Brown.

The standard tax-free personal allowance is £11,850, increasing to £12,500 from 6 April 2019. A taper applies to those with taxable income surpassing £100,000, which reduces their personal allowance by £1 for every £2 above that figure.

This results in a ‘tax trap’, with an effective rate of 60% income tax payable on earnings between £100,000 and £123,700. There are multiple methods to avoid this trap, but one of the most straightforward is through pension contributions.

For personal pension contributions the provider will reclaim basic rate tax relief of 20%. To obtain further relief the ‘gross contribution’ is recorded on your tax return, and used to reduce your taxable income for that year.

If your taxable income is reduced below £123,700 you will receive further tax relief of 20% on the contribution (higher rate tax at 40%, less the basic rate received within the plan), and further tax relief of 40% on the recovered personal allowance, as our example shows:

Net Contribution


Basic Rate Relief (Plan)

£  4,740

Gross Contribution


Higher Rate Relief (Tax Assessment)

£  4,740

Tax Recovered from Personal Allowance

£  4,740

Total Tax Relief


Percentage of Gross Contribution


As this is claimed via your tax assessment, the relief is acquired via rebate after the relevant tax year.

Pension contributions may be utilised in this manner whether you have regular income exceeding £100,000 or if your taxable income has spiked for a particular tax year, such as from exercising share options or from a redundancy payment.

However, the rules surrounding this area can be complicated. If your income exceeds £150,000 your ability to make contributions may be affected by another taper which limits the amount you may place in a pension each year. If your income is at these levels then obtaining advice is essential before making further pension contributions, particularly as there may be alternative options which are more suited to your needs.

If you require advice on mitigating your tax liability and planning for your future please contact one of our Wealth Managers at NW Brown, who are more than happy to help.


The following subsidiary of NW Brown Group Ltd is authorised and regulated by the Financial Conduct Authority to provide regulated services: NW Brown & Company Ltd (191123).



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