How high earners can maximise pension contributions

We have seen it for a few years now: Government taking the decision to limit pension contributions for higher earners. In 2018/19, the lifetime pension allowance limit was reduced to £1.03m, down from £1.8m.

It’s the same situation with the annual pension allowance. Back in 2010/11, you could contribute £255,000 into your pension each year. Now, it’s only £40,000.

Ben Hewitt, Chartered Financial Planner, explains how to use your pension contributions to save on tax. "If you earn over £100,000 in any one tax year, I’d strongly encourage you to take advice on making contributions into your pension."

What is the annual allowance?

The maximum amount we can all contribute to a pension plan (on which we can receive tax relief) is 100% of our earnings or £3,600, whichever is greater. This is then capped by the annual allowance which, for the 2018/19 tax year, is £40,000.

What is the tapered annual allowance?

The Government announced that from April 2016, a reduced annual allowance may apply to all pension contributions, depending on the level of taxable income within the tax year. This reduction was introduced using a tapering of the annual allowance for those with income of over £150,000. For every £2 of ‘adjusted’ income over £150,000, your annual allowance will be reduced by £1 to a minimum of £10,000 i.e. where income exceeds £210,000 the maximum annual allowance is just £10,000.

What can I do now?

Assuming that you’ve had a pension in place since 2015/16, you can make a pension contribution of up to £160,000 before 5th April 2019.

High earners can carry forward any unused annual allowances from the previous three tax years, starting with the current tax year. This means that larger contributions can be made which will attract income tax relief of up to 45% (or 60% if enough can be contributed to bring taxable earnings to below £100,000. This means that for every 65p, HMRC will contribute 45p in tax relief – 20p at source and 25p though a claim made on your tax return.

Time is running out for high earners to make the most of this opportunity this year, going back to the 2015/16 tax year - the maximum available amounts of unused contributions for 2015/16 and 2016/17 is £40,000, which means it may be possible to make a maximum pension contribution of up to £160,000.

If you don’t use your unused annual allowance from 2015/16 by 5 April 2019, then this allowance will be lost.

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.