Since 2016, high earners have had to accept what can seem like a draconian block on how much they can put into their SIPP. But there may be a nice little trick that could sweeten the medicine here
Say you’re a high-ranking professional in the tech sector, in finance, or in another high-paying job. Be happy—you deserved it… but be ready for a little rain on your financial parade; if you earn above £260,000 a year in practical terms while Joe Schmoe can sock away (if they have it) £60,000 a year, you can only put £10,000 per annum into your pension and receive tax relief..
Huh? Not fair? Sorry, them’s the rules. As a high earner, you have just run into a delightful little thing called the tapered annual allowance. If you have ‘threshold income’ above £200,000 and ‘adjusted income’ above £260,000 of ‘adjusted income’, i.e. your total income plus whatever employer pension contributions you’re in receipt of, then the state says you can only put in £10,000 per year.
And that’s yer lot. On this one, don’t blame Rachel Reeves; this one’s a Tory perk for the 99.5% of the population not earning as much as you, introduced in April 2016 by then-chancellor George Osborne. Also, please note that the bowler hat people also need you to add in all your net income include trading profits, income from property (rental income), dividend income, and so on ad infinitum.
Well, to be accurate, the pension contribution allowance goes down by £1 for every £2 your adjusted income rises above £260,000. The minimum this can taper to is £10,000. So, if your adjusted income for the tax year is £290,000, so £30k over the minimum limit, your annual allowance drops by £15,000 (£30,000 divided by 2) to £45,000, and so on. Should you be in the fortunate position of racking up adjusted income of over £360,000, τhe maximum reduction is £50,000.
OK, there’s a problem here. What can you do about it?
There’s a lot of maths in all this but see the wood for the trees. Hitting a tapering pension cliff edge can be deflating and knock a bit of the shine off all your amazing success, and it’s hard to resist the temptation to look for alternative long-term investment vehicles (although you should always be contributing to your ISA). The thing is, a pension is as close to what the economists say is the iron rule of there being no such thing as a free lunch (i.e., every benefit has a cost attached somewhere) as you get in modern society. If you are in the 45% tax bracket, i.e. enjoying earnings above £125,140 a year, and paid just 7%, call it £8,000, into a pension the taxman rounds it up to £10,000 —and when you do your tax return, the government effectively refunds you £2500 of tax.
If you reinvest the tax relief as an additional rate taxpayer that you receive, the calculator will show you have only shelled out £5,500 but somehow magically another £10,000 has ended up for your long-term post-work life. That’s a very safe, Crown-guaranteed ROI that you can’t really get otherwise.
So, it’s important to just bite the bullet on tapering and not abandon your pension and keep contributing to it. But there’s actually a rather nice wrinkle that (Michael Caine voice) not a lot of people know about, and that we advise our clients in this position to do, carry forward—and so to make pension contributions that exceed the annual allowance but still allow you to benefit from that sweet tax relief.
A lot of people don’t realise they have accrued unused allowances in the past three tax years prior to a carry forward year. If you have some cash, it might be more pragmatic to not look at alternatives to pensions but catch up on these, because of the great tax benefits that a pension has.
After all, and it’s your choice, but if you don’t use them, you will lose them (specifically the one that was the third tax year prior to the one we’re in now). So, make it work for you—especially in your late 40s/early 50s, when you are not a million miles away from being able to access pension savings (remember that from April 2028 the age you can start taking your pension is changing from 55 to 57).
If you have recently started earning a lot, then the genuinely best thing I think you can do is speak to an adviser to help you see if you can take advantage of these unused allowances, perhaps you were earning less. The danger is that if you are now at a level when you are doing well and look like that is staying that way, you will always be limited to this £10,000; it’s last chance saloon, so use this little gift from Whitehall or lose it forever.
Don’t lose sight of your final goal
Maybe you’re in your 20s reading this and still able to get out of bed without a lot of moaning and groaning. Well, sure, you may not want to lock up your money and want to concentrate for a while on building a life and saving for a deposit or travelling. More power to your elbow, but don’t duck this one forever—especially if you are doing well in your chosen career and can see a time in the not-too-distant when you might have some surplus.
NB if you want to claim back the full amount of tax relief, you must pay enough tax at the relevant rate. So, do yourself a favour, make some more coffee, turn on the not available flags on Outlook, and have a play right now with the official pension allowance calculator here.
Then, really be good to yourself and email us to help you maximise your allowances and make that £10,000 clean its face for you and yours.
- The value of investments and any income from them can fall as well as rise. You may not get back the full amount invested.
- The favourable tax treatment of ISAs may be subject to changes in legislation in the future.
- This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
- The value of pensions and any income from them can fall as well as rise. You may not get back the full amount invested.
- Levels and bases of, and reliefs from, taxation are subject to change and their value will depend upon personal circumstances. Taxation and pension legislation may change in the future.
