Tax planning for high earners
Important information: This isn’t personal advice. If you’re not sure what’s right for your situation, please seek advice. Unless stated otherwise all the figures below apply to the 2022/23 tax year. Pension and tax rules can change, and benefits depend on your circumstances. Different Scottish income tax rates and bands apply. You’ll usually need to be at least 55 (rising to 57 from 2028) before you can access the money in your pension. For help with complex taxation, please speak to an accountant.
Tax planning is nothing new, but without a suitable strategy in place, you run the risk of missing out on important tax benefits.
If you’re a high earner, investing in a pension, an ISA or both, could help you to reduce the amount of tax you pay, and even claim some money back.
Even if you have these accounts already, there might be some tax saving tricks you’ve missed.
Just remember all investments should be held for the long-term and can rise and fall in value. Although investment gains are possible, you could also make a loss.
Investing with a pension
- Pay in up to £40,000 each tax year across all your pensions
- Get up to 45% tax relief on your contributions
- Potential to grow your money free of UK income and capital gains tax
- Make withdrawals from age 55
- Up to 25% paid tax-free and the rest taxed as income
The amount that can be paid in and how much tax relief you can receive are subject to certain limits and age restrictions explained below. The minimum pension age is also rising to 57 from 2028.
Investing with an ISA
- Pay in up to £20,000 each tax year across all your ISAs (£4,000 limit for Lifetime ISAs).
- Potential to grow your money free of UK income and capital gains tax
- Make withdrawals when you need to
- All withdrawals are tax free
Withdrawals made from Lifetime ISAs before age 60, for anything other than an eligible house purchase, are normally subject to a 25% penalty charge.
What are the tax benefits of a pension?
Paying into a pension is one of the most tax efficient ways to save for retirement. For high earners the tax perks are even more attractive. Look at the example below.
|Tax status||Contribution||Tax relief||Total cost|
|Basic rate taxpayer||£10,000||£2,000 (20%)||£8,000|
|Higher-rate taxpayer||£10,000||£4,000 (40%)||£6,000|
|Additional-rate taxpayer||£10,000||£4,500 (45%)||£5,500|
As long as you’re a UK resident under 75, you can usually shelter up to £40,000 (or up to 100% of your earnings if lower) each tax year and get tax relief from the government. The amount you’ll receive depends on your tax status, as shown in the table above. You must pay sufficient tax at the higher or additional rate to claim the full 40% or 45% tax relief.
Basic-rate tax relief will be paid automatically on top of anything you pay into your pension. Then if you’re a high earner you can claim up to a further 20% or 25%. Any money in a pension is also free from UK income and capital gains tax.
Try our tax relief calculator to find out how little a pension contribution could cost.
Remember, pension and tax rules can change, and benefits depend on your circumstances. Different Scottish income tax rates and bands apply.
How can I claim higher rates of tax relief?
If you have a personal pension and you pay tax at a higher rate, you’ll usually need to complete a self-assessment tax return to reclaim higher rates of tax relief. The money will be paid to you personally and not to your pension. This can also be the case for some workplace pensions.
Similarly, for other pension schemes, tax relief might be received by reducing the amount of income tax you pay meaning you won’t have to claim it.
Two ways to claim back higher-rate tax relief
Pension allowances to watch out for
Typically you can pay in as much as you earn, up to the annual allowance of £40,000 each tax year (this limit includes any tax relief from the government and employer contributions). However, if you have an ‘adjusted income’ of over £240,000 your annual allowance could be as little as £4,000. If you’ve flexibly accessed a pension then the amount that can be paid into money purchase pensions, such as the HL SIPP, is limited to £4,000. Get your annual allowance factsheet for more details.
There’s also a limit on the total amount you can build up in a pension throughout your lifetime without getting a tax charge. It’s called the lifetime allowance which is currently £1,073,100 for most people (and due to remain at this level until at least April 2026).
How to increase your Personal Allowance
The standard Personal Allowance is £12,570, which is the amount of income you do not have to pay tax on. If your income is more than £100,000 you’ll start to lose your tax-free Personal Allowance. This will be lost at a rate of £1 for every £2 of income over £100,000. Your Personal Allowance would be fully lost if your income is £125,140 or above.
By making a pension contribution, you can reduce your adjusted net income, and start to restore part (or all) of your Personal Allowance. Find out more, including examples, in our factsheet.
Pension carry forward rule
The carry forward rule lets you take advantage of any unused annual allowances from the previous three tax years. Currently that’s up to £40,000 each year (2020/21, 2019/20 and 2018/19).
Including the current tax year, that could mean you’re able to make a pension contribution of up to £160,000 and receive tax relief (as long as your earnings are high enough).
To use this rule you need to have been part of a UK registered pension scheme in the years you want to carry forward unused allowances from. It doesn’t matter if you contributed or not. Try our calculator to find out how much you could carry forward.
Pay into a child or someone else's account
You could consider paying into a loved one’s pension or ISA, especially if you’ve used up your own allowances. This could be a husband, wife, civil partner, partner, child, or friend.
If you are paying into a pension or ISA for someone else, then the amount that you can pay in will depend on their circumstances, not on yours. You should confirm with them if they’re happy for you to do so, and that you won’t make them go over whatever their annual limit is - as this will be linked to whatever has already been paid into their accounts and, for pensions, how much they earn.
For most people the annual limits are £20,000 for ISAs and up to £40,000, or their earnings if lower, for pensions. The limit that can be paid into a Junior pension is normally £3,600 (including tax relief) and £9,000 into a Junior ISA.
If you pay into someone else’s pension, tax relief is based on the tax rate of the person whose pension it is. Even if they’re not earning, as long as they are under 75, you can pay in up to £2,880 each tax year and they’ll receive 20% in tax relief from the government. This adds up to a total contribution of £3,600, which is the most that can be paid into a non-earner’s pension.
Saving into a pension on behalf of someone else doesn’t affect how much you can save into your own pension. To pay into a pension for someone else, they’ll need to open an account in their own name first. With HL you can also manage your family accounts all in one place through linked accounts.