By Paul Attridge
13 May 2025
This article was updated on 13 May 2025
Here, we explore the key pension tax planning opportunities for high earners (those who have relevant earnings in excess of £50,000 per annum).
High earners pay tax at 40%, 45% and 60%; pension contributions can attract substantial tax relief which may increase cashflow and provide income for the future.
When paying money into a registered pension scheme, tax relief is available by extending the basic rate and higher rate tax bands. The tax bands are extended by the gross amount of the pension contribution. Therefore, if an individual pays £800 into a pension scheme the basic and higher rate thresholds are extended by £1,000 each (£800 x 100 / 80).
The threshold, currently at £100,000, where an individual’s Income Tax personal allowance starts to be reduced is increased by the amount of gross pension contributions made. This means that tax relief of up to 60% can be achieved on the contribution.
In addition, payments to a pension scheme are made net of 20% tax. Therefore, if an individual pays £800 into a pension pot HMRC will refund £200 to the pension provider to make up to a gross contribution of £1,000.
The annual allowance is the maximum that can be input into a pension scheme in any tax year. For 2025/2026 this is £60,000 gross. Any unused allowances from the previous three years may be utilised as well. This is calculated on a first in first out basis once the current year allowance has been utilised in full. However, an individual can only utilise brought-forward allowances if they were a member of a registered pension scheme in those years. If the amount input exceeds the available allowances, then the annual allowance charge will apply.
Subject to the annual allowance, the maximum tax relievable contribution that can be made by an individual into a pension fund is 100% of their relevant earnings in that tax year. However, anyone can pay up to £3,600 gross per year irrespective of their level of earnings.
Relevant earnings are made up of:
It is worth noting that the relevant earnings restriction does not apply to employer contributions.
The annual allowance may be tapered if you are a high earner. An individual is a high earner if their ‘threshold income’ is over £200,000 and their ‘adjusted income’ is over £260,000. If the thresholds are exceeded, the annual allowance will be tapered by £1 for every £2 of adjusted income in excess of the adjusted income threshold. The tapered allowance cannot be reduced below £10,000. When the pension input exceeds the available annual allowance, the excess will be subject to Income Tax. This will be deemed to be an individual’s top slice of income and therefore will be taxed at their marginal rate. This means that a higher earner may opt to restrict their contributions up to £10,000 instead in order to avoid the tax charge.
For higher earners whose employer makes pension contributions on their behalf as part of their remuneration package, it should be worth noting that even though this may exceed the annual allowance and trigger an Income Tax charge at their marginal tax rate of 40%/45%, the employee still benefits from an uplift in their pension fund from the net employer’s contribution of 60%/55%. As such, it is important to consider your circumstances carefully and obtain specialist tax advice when reviewing the potential impact of employer contributions that may result in an exposure to the pension savings tax charge.
Threshold income is net income less the gross amount of personal pension contributions where basic tax relief has been given at source (generally where payments are made into a SIPP).
Adjusted income is the net income plus gross pension contributions made via salary sacrifice and the amount of pension contributions made by the employer.
The lifetime allowance charge was abolished from 6 April 2023 so is no longer a consideration.
From 6 April 2027, unspent defined contribution pension pots will become subject to Inheritance Tax (IHT) in the UK, which is a change to the current situation where funds typically fall outside the taxable estate. Under the new regime, pension pots will be included in the deceased’s estate for IHT purposes, potentially incurring tax at 40% if the estate exceeds the nil-rate band. Responsibility for paying the IHT will fall to pension providers, not executors. Those with significant pension savings should review their estate plans to mitigate the impact of these changes.
Making pension contributions can mitigate the loss of personal allowances where an individual’s income is in excess of £100,000.
Additionally, another planning point is the use of pension contributions made via salary sacrifice. This will save tax and National Insurance Contributions, which would have been typically due on an individual’s gross income. Some employers may often be willing to contribute the savings on National Insurance into the pension pot.
Anyone can contribute to someone else’s pension too, for example, a spouse or family member. As this could be rather complex and intricate, please contact us if you want to find out more.
Pension contributions, as well as providing tax efficient savings for the future, can provide immediate tax relief for high earners. Individuals earning over £200,000 should obtain professional advice regarding their contributions and annual allowances may be affected and unwelcome tax liabilities could be payable. Contributions can also be made strategically to prevent higher and additional rate tax being paid and personal allowance being lost.
If you need advice for your pension planning, please contact an expert member of our team today.
