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Personal pension higher rate relief

Higher rate tax relief is given by increasing the basic rate and higher rate band by the amount of gross contribution paid into a personal pension. The effect of this is that the investor will get higher rate relief by paying basic rate tax on income that they would have otherwise paid higher rate tax on.

Tax relief limits

The maximum amount of contributions on which a member can claim relief (up to their available annual allowance) in any tax year is the greater of:

  • the ‘basic amount’ – currently £3,600, and
  • the amount of the individual’s relevant UK earnings that are chargeable to income tax for the tax year.

Claiming the tax relief

Personal pensions that are run on a 'relief at source' basis (including the Old Mutual Wealth personal pension and Collective Retirement Account) will give basic rate relief within the pension scheme. If an investor pays £80 net, the scheme administrator will invest £100 into the personal pension and claim the £20 tax relief back from HMRC on behalf of the investor.

A higher rate tax payer will be entitled to another £20 of higher rate relief (or £25 if they pay tax at 45%). This is claimed by the investor through their Self Assessment or by sending a letter separately to their tax office.

Tax relief is not available for employer contributions which are paid gross. The employer may be able to offset the pension contribution as a business expense against their corporation tax bill.

Calculating the tax relief

Higher rate tax relief works by increasing the thresholds upon which an investor pays basic and higher rate tax by the amount of gross personal pension contribution paid. This is detailed in Income Tax Act 2007 part 2 chapter 3 and FA 2004 section 192 (4).

Example 1

Take an individual earning £61,450 who would normally be paying 20% tax on the next £32,000 of income, after personal allowance, and 40% on the next £18,450: the individual paid a £18,450 gross personal pension contribution this would push the basic rate band up to £50,450 (after personal allowance), meaning that the individual now pays tax at 20% on all income and no longer pays any higher rate tax. The individual receives higher rate tax relief, by not paying higher rate tax.

So here the individual received 20% relief through self assessment and the other 20% relief is received at source through the pension provider by paying a net contribution and seeing it grossed up within the scheme, giving them a total of 40% on the full £18,450 gross contribution.

Example 2

Tax bands for 170000 earnings

Example 3

Tax bands for 170000 earnings with 10000 pension contribution

Both basic and higher rate thresholds increase by £10K. This effectively replaces some of the higher rate with the equivalent increase in the basic rate. They therefore receive 25% relief. Adding that to the 20% gross up by the provider gives 45%.

Income tax bands for 2016/17 (ignoring dividends)

Personal allowance is £11,000

Basic rate of 20% tax on income up to £32,000
Higher rate of 40% on income between £32,000 and £150,000

Additional rate of 45% on income over £150,000

Calculation for example 2

Employment Income   £170,000
Less Personal Allowance   £0*
Taxable Income   £170,000
Tax payable    
Income tax at 20% on first £32,000   £6,400
Income tax at 40% on next £118,000   £47,200
Income tax at 45% on next £20,000   £9,000
Total income tax payable   £62,600


Calculation for example 3

Employment Income £170,000
Less Personal Allowance £0*
Taxable Income £170,000
Tax payable  
£10,000 pension contribution increases basic rate and higher rate band by £10,000
Income tax at 20% on first £42,000 £8400
Income tax at 40% on next £118,000 £47,200
Income tax at 45% on next £10,000 £4,500
Total income tax payable £60,100


*In this example client has no personal allowance left as the allowance is reduced by £1 for every £2 of income over £100K.

The client has received the full 45% tax relief on a £10,000 gross personal contribution to a personal pension.

Tax relief given is a combination of paying £2,500 less tax on their income, together with the £2,000 of tax relief granted within the pension scheme, giving them total tax relief of £4,500 on a £10,000 contribution.

Alternatives to relief at source method

There is an alternative way to receive tax relief on pension contributions known as the 'net pay arrangement'. This is only applicable where personal contributions are deducted through payroll by the employer. As the contribution is taken from the member’s pay before tax is calculated they have effectively been given full tax relief. It is not possible for a personal pension scheme to be run on this basis.

Most occupational schemes will operate on the 'net pay' basis.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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