June 27, 2025
Article
With the current freezes in income tax rates and bands it is worthwhile remembering that making a personal contribution into your pension can be a very efficient way to reduce your tax liability.
When an individual makes a Personal Pension Contribution (PPC), they benefit from an extension of their basic and higher rate tax bands. This means more of their income is charged to tax at a lower rate. It also reduces their Adjusted Net Income (ANI) which is calculated using an individual’s total taxable income less any gross PPC and/or gross gift aid donations.
An individual can make gross pensions contributions of up to £60,000 per tax year, if they have sufficient Net Relevant Earnings (NRE). Unless they are a high earner, in which case their annual allowance could be restricted to a minimum of £10,000. There may be available allowances from the previous three tax years to utilise also. If you do not have sufficient NRE, you can still make an annual gross personal pension contribution of £3,600 (£2,880 net).
A high earner for these purposes would be an individual with ‘threshold income’ (income less any personal pension contributions) above £200,000 and ‘adjusted income’ (taxable income plus any employer pension contributions) of more than £260,000.
If your ANI exceeds £100,000, your personal allowance begins to be tapered and is fully restricted once your income exceeds £125,140. Therefore, income falling between £100,000 and £125,140 is taxed at an effective rate of 60%. A PPC could therefore preserve more of your tax-free allowances as this would reduce your ANI.
If you or your spouse/civil partner are subject to the High-Income Child Benefit Charge (HICBC), and your income is near the relevant thresholds, a PPC reduces your ANI as mentioned above, and is therefore taken into account before calculating any potential repayment of child benefit.
If you would like to look at how making a personal pension contribution could reduce your tax liability, then please don’t hesitate to get in touch.
We would also always advise that you seek advice from a financial advisor before making the contribution and our financial planning team would be happy to help review your position.