Tax planning for high earners
Important information: This isn’t personal advice. If you’re at all unsure about what course of action is right for you, please seek advice. Pension and tax rules can change and benefits depend on your circumstances. Scottish income tax rates are different and different benefits 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 or ISA 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’re missing out on.
What are the tax benefits of a pension?
Paying into a pension is one of the most tax efficient ways to save for retirement. But for high earners the tax perks are even more attractive. Just take a 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 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.
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, tax rules can change and benefits depend on your circumstances.
How can I claim higher-rate tax relief?
Most high earners claim higher or additional rate tax relief through their tax return. Otherwise you can write to your local Tax Office.
If you’ve made pension contributions in previous tax years which would have entitled you to additional tax relief, but you haven’t claimed for it yet, it might still be possible to claim. Our guide to claiming higher rate tax relief offers more information.
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). However, if you have an ‘adjusted income’ of over £210,000 - your annual allowance could be as little as £4,000. If you’ve flexibly accessed your pension, your allowance will also be reduced 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 and for this tax year (2020/21) it's £1,073,100.
Increasing your Personal Allowance
If your income exceeds £100,000 you’ll start to lose your tax-free Personal Allowance, which is currently £12,500 (in 2020/21). This will be lost at a rate of £1 for every £2 of income over £100,000.
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
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 (2019/20, 2018/19 and 2017/18).
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 haven’t made a contribution. Try our calculator to find out how much you could carry forward.
Pay into a spouse’s or child’s pension
If you’ve used up your pension allowance, you could consider paying into a loved one’s pension. You can pay in up to the amount they earn.
Even if they’re a non-earner, 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 a spouse, they’ll need to open an account in their own name first.
Switch your pension on - act by 5 April
Make the most of your pension allowance this tax year.
You can set up monthly payments into your HL SIPP from as little as £25, or make one-off payments of £100 or more by debit card.
The Self-Invested Personal Pension (SIPP)
SIPPs offer the same generous tax benefits as other pensions. You can shelter up to £40,000 each tax year. Find out more about how SIPPs work, including charges, and how to get started.
Tax efficient investing with an ISA
Alongside a pension you could also consider saving and investing in a Stocks and Shares ISA.
You can shelter up to £20,000 (2020/21) each tax year.
Your money has the potential to grow free of UK income and capital gains tax. And although investing is best for the long term, you’re free to withdraw your money whenever you need to.