Prime examples of this are those who are subject to the Child Benefit Tax Charge (CBTC) or have income in excess of £100,000 per tax year.
The Personal Allowance is reduced by £1 for every £2 of total income over £100,000. Once income exceeds £125,000 then the entire standard Personal Allowance of £12,500 would be lost. A pension contribution could be made to reduce assessable income by the level of the gross contribution.
If income was £110,000 and a gross pension contribution of £10,000 was made, the assessable income would be reduced by the £10,000 pension contribution, re-instating £5,000 of Personal Allowance. The pension contribution would be made net of basic rate tax relief and so a payment of £8,000 would be required. This means that a net pension contribution of £8,000 would provide a gross pension credit of £10,000 and generate tax savings of £6,000.
Where someone in the household earns more than £50,000, child benefit starts to be withdrawn at the rate of 1% for every £100 of excess, so that it is entirely lost once their earnings reach £60,000. So, for someone earning £51,000 they would lose 10% of their child benefit. As per the example above, a pension contribution could be made to reduce the level of assessable income thereby saving on the CBTC and generating additional higher rate tax relief.
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