Tax Year-End: Avoiding the 60% tax band!

For those of you earning over £100,000 this tax year, remember that for every £2 of income earned over £100,000 an individual loses £1 of their personal allowance until they have no allowance left.

This makes the effective rate of tax 60% on income between £100,000 and £120,000 for 2014/15. (40% tax on the £2 (80p) plus 40% tax on the lost £1 allowance (40p) = £1.20 tax on £2).

So when your income is over £120,000 all the personal allowance is lost as this is double the personal allowance.

The measure of £100,000 is the ‘adjusted net income’. Broadly, this is total taxable income less certain deductions e.g. gift aid donations and gross personal pension contributions.

The Plan

You can get your adjusted net income back down below the £100,000 if you can make a lump sum pension contribution of a suitable size:

  • Identify total income for personal allowance purposes i.e. adjusted net income
  • Calculate excess over £100,000 limit
  • Calculate contribution to reduce adjusted net income to £100,000
  • Make the personal pension contribution in the tax year in which the personal allowance is lost.


Mr Savvy has income of £110,000 so has lost some of his personal allowance. A personal pension contribution of £8,000 net, £10,000 gross is made.


So, the contribution has the dual impact of increasing the amount of tax free income through the reclaimed allowance as well as pushing out the basic rate band.

For a resulting net spend of £4,000 Mr Savvy has reduced his tax bill by £6,000 and generated a £10,000 into his pension pot.

The contribution of £10,000 has saved £4,000 in tax and received relief in the pension of £2,000 – an effective rate of tax relief of 60%!

Tax Year End Planning: Pensions

Higher Rate (50%) Tax Payers: Tax Relief on Pension Contributions could be at risk. 

Recently, there has been much comment regarding the potential alteration to Higher Rate Pension Tax Relief.

To be on the safe side it might be an idea to ensure all top-up pension contributions for this tax year are processed before the next Budget is announced on Wednesday 21st March 2012.

So, if you typically make a year-end top-up contribution to your pension and you are a higher rate taxpayer (gross income over £150k)…………

***** Make Tuesday 20th March 2012 your Tax Year End *****  


Carry forward pension rules change – use your 2008/2009 allowance now.
5th April 2012 marks the last chance to pick-up any unused 2008/2009 allowance. If you wish to make aggregate gross  contributions (including employers’) into your pension of more than £50,000 this tax year, then utilise carry forward. Don’t lose the past allowance from  2008/2009 pension annual allowance in your carry forward calculations. 


Lifetime Allowance (LTA) and Fixed protection
If you believe your pension may be greater than the new reduced £1.5m LTA value coming April 6, 2012 when you come to take benefits, you should act now. By applying for fixed protection by 5th April 2012 you can retain an LTA of £1.8 million, and protect your pension from future excess tax charges.  Final Salary pensioners would multiply their expected pension figure by 20 and add any cash lump sum in calculating whether they risk breaking the limit. The LTA is not due to be increased for some time, it is rumoured.