Tax relief is available on your pension contributions at the highest rate of income tax. The relief depends on whether you are in a ‘net pay’ or ‘relief at source’ arrangement.
A ‘net pay’ arrangement is when your pension contributions are deducted from your salary by your employer before income tax is calculated on it. Relief is immediate at the highest rate of tax.
A ‘relief at source’ arrangement is generally used by personal and stakeholder pensions. Contributions are made from net income. Tax relief is provided by including it on a self-assessment tax return.
The personal allowance (£12,500 for 2019/20) for income tax is gradually reduced to nil for individuals with adjusted net incomes in excess of £100,000. The reduction is £1 for every £2 of income over the limit i.e. if adjusted net income is £125,000 you have no personal allowance and your effective tax rate on income can be up to 60%.
Adjusted net income is after payments made gross to pension schemes and gift aid donations. Contributions should be grossed up ahead of reducing adjusted net income i.e. £1 becomes £1.25.