Briefing Notes Reclaiming Pers Allowance 680 392

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 briefing note is also available as a PDF

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.