Reclaiming the Personal Allowance
A look at how making a pension contribution can help individuals reclaim lost Personal Allowance.
A look at how making a pension contribution can help individuals reclaim all or part of their personal allowance where this has been lost.
Key Points
- Individuals with adjusted net incomes in excess of £100,000, lose their personal allowance at a rate of £1 for every £2 of income over £100,000.
- In the tax year 2020/2021, for adjusted net incomes over £125,000, an individual’s personal allowance is completely lost.
- Making a pension contribution, where it reduces adjusted net income below £125,000, can potentially allow an individual to reclaim part or all of their personal allowance.
- The effective rate of tax relief on the personal pension contribution can be as much as 60%.
Reclaiming all or part of the personal allowance
How is the personal allowance lost?
The personal allowance is reduced as follows:
- For every £2 of adjusted net income over £100,000, an individual loses £1 of their personal allowance
- In the 2020/2021 tax year, this results in the complete loss of the personal allowance for adjusted net incomes over £125,000
How can making a pension contribution help?
Making a pension contribution can:
- Effectively reduce an individual’s adjusted net income
- Reduce income to under £125,000 enabling them to reclaim part of their personal allowance
- Enable individuals to reclaim the full personal allowance where adjusted net income is reduced to £100,000 or less
Example - Sandra
Sandra has adjusted net income of £125,000 and has therefore lost her personal allowance.
Can making a pension contribution help Sandra reclaim her lost personal allowance?
If Sandra makes a net pension contribution of £20,000, she can:
- Benefit from a grossed up pension contribution of £25,000
- Receive higher rate tax relief (through a self assessment tax return)
- Reduce her adjusted net income down to £100,000
- Reclaim her full personal allowance of £12,500
Effective cost to Sandra:
£10,000
Effective rate of tax relief is:
60%
Planning considerations
Pension tax planning can help clients:
- Make full use of the annual allowance
- Utilise any carry forward of unused allowances
- Build up retirement benefits
Pension tax planning can help clients:
- Reclaim part or all of the personal allowance (up to £12,500 for 2020/2021)
- Effectively get up to 60% tax relief on a pension contribution
- Reduce their overall levels of income tax
- Reduce tax due on other investment income or gains within the tax year
This document is based on Canada Life’s understanding of applicable UK tax legislation and current HM Revenue & Custom’s practice, as at March 2020 and could be subject to change in the future. It is provided for professional advisers only. Any recommendations are the adviser’s sole responsibility.