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 financial advice. Unless stated otherwise all the figures below apply to the 2024/25 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.
What is tax planning?
Tax planning refers to reducing an individual’s tax bill by making use of any available allowances and reliefs.
It’s nothing new, but without a suitable strategy in place, you run the risk of missing out on important tax benefits.
Tax-efficient investing
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 can rise and fall in value so although investment gains are possible, you could also make a loss.
Investing with a pension
- Pay in up to £60,000 each tax year across all your pensions (limit may reduce in some cases)
- 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
- Usually 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 which are explained below. The age you can access your pension 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
Investments should be considered for the long term (5 years or more). 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 | Effective 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 £60,000 (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.
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. Just be aware, you must pay sufficient tax at the higher or additional rate to claim the full 40% or 45% tax relief.
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.
Two ways to claim back higher-rate tax relief
How to claim higher rates of tax relief on pension contributions
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 into 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.
Maximum pension contributions for high earners
The annual pension allowance rose from £40,000 to £60,000 on 6 April 2023.
For several years the allowance had been stuck at £40,000, meaning you could pay in £32,000 and the government would add £8,000 in tax relief on top. Now you could pay in up to £48,000 and the government will add £12,000 in tax relief on top. Higher and additional rate taxpayers can claim back up to a further £15,000. To get tax relief, your personal contributions can’t be any higher than your earnings, or £3,600 if this is greater. If your 'adjusted income' is over £260,000 your annual allowance could be as little as £10,000.
Tax planning strategies for higher earners
Tip 1 - 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.
Tip 2 - Carry forward unused annual allowance
The pension carry forward rule lets you take advantage of any unused annual allowances from the previous three tax years. That’s up to £60,000 for tax year 2023/24 and up to £40,000 from tax years 2022/23, 2021/22.
Including the current tax year, that could mean you’re able to make a pension contribution of up to £200,000 and receive pension 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.
Tip 3 - 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, or child. Make sure you confirm with your loved one if they’re happy for you to do so, and that you won’t make them go over whatever their annual limit is. If you’re paying into your child’s account as a parent or legal guardian, normally you can manage the account, and make any investment decisions, until the child turns 18.
For most people the annual limits are £20,000 for ISAs and up to £60,000, or their earnings if lower, for pensions. The annual limit that can be paid into a junior pension is normally £3,600 (including tax relief) and up to £9,000 can be paid 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 other than your child, 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.
Make the most of tax relief with a SIPP
If you open an award-winning HL Self-Invested Personal Pension, you can look forward to the main pension tax benefits. As well as getting tax relief, you can shelter your money from UK income and capital gains tax. Plus you’ll benefit from:
- Security - We're a FTSE-listed company, trusted by 1.8 million clients and regulated by the Financial Conduct Authority.
- Award-winning service - Best Buy Pension 2023 and Best investment App 2023 from the Boring Money Awards.
- Ease - Check your pension anytime online or with the HL app.
- Ongoing support - Get help from our UK-based helpdesk and the answers to your questions no matter how big or small.
How to add money to your SIPP
Adding money to your HL Self-Invested Personal Pension (SIPP) can help you make the most of your pension annual allowances and any tax relief you could be entitled to.
The quickest way to add money to your SIPP is with a lump sum online or through the HL app. Please read the Key Features (including contribution checklist) first, then:
1. Log
in
to your
account online or through the HL app
2. Select your SIPP account and choose 'Add money'
3. Follow the debit card instructions
Don’t forget our UK-based helpdesk are on hand to answer any questions you might have. And you can view our charges online anytime.
Money in a pension isn’t usually accessible until age 55 (57 from 2028).
Pension essentials
How much should I pay into my pension?
Not sure how much to pay into your pension? Here we explore what to consider when deciding how much to contribute, and why it pays to start early.
Eight ways to make the most of your pension
From starting your retirement saving early to getting to grips with pension tax benefits, here are 8 top tips to help you make the most of your pension.
Are you ever too young to have a pension?
If you’re looking for a way to help your children or grandchildren financially, paying into a pension can get them off to a great start.
New to SIPPs?
Download our guide to find out more about how SIPPs work and how to get started.
Need help from an expert?
Tax planning can be complex. If you need help from an expert our financial advisers can work out the most tax efficient way to make use of your allowances.
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Help and support
Take a look at our most frequently asked questions for quick answers.
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