Planning for Retirement

Pensions and personal allowance

  • Shunil Roy-Chaudhuri
  • 04 July 2023
  • 5 mins reading time

The 60 percent tax that can be imposed on an income of between £100,000 and £125,140 in England, Wales and Northern Ireland has been called the highest tax band in Europe by the Financial Times (1). However, higher earners could potentially bring the rate down by saving more for retirement.

How much can I save tax-free for retirement?

Well, there are limits, with the annual tax relief on pensions restricted to the higher of the following two amounts:

  • £3,600; or

  • 100 percent of what HMRC describes as ‘relevant UK earnings’, up to the maximum annual pension allowance of £60,000. Some income, though, doesn’t count as ‘relevant UK earnings’ in the eyes of HMRC, including dividends and investment income, and income from pensions. So income from these sources cannot be included when you’re calculating how much you can put into a pension and obtain tax relief on those contributions.

Is there really a 60 percent tax rate?

Yes and no. There is no official 60 percent UK tax band, but higher earners can end up paying this rate because HMRC claws back the annual personal allowance for incomes above £100,000, giving rise to an effective tax rate of 60 percent on part of the income.

What is the personal allowance?

This is the part of our income that is not liable for tax, and is currently £12,570. In other words, we pay no tax on the first £12,570 of our annual income.

Except when we earn more than £100,000?

Exactly. For every £2 of salary above £100,000, the personal allowance is reduced by £1. This applies to salaries up to £125,140, at which point the personal allowance is entirely depleted.

How does this equate to a 60 percent tax rate?

Well, income between £50,271 and £125,140 is taxed at the higher rate of 40 percent. However, for someone earning £120,000 they will have lost £10,000 of their personal allowance (as it will have been reduced by £1 for every £2 of their salary which is over £100,000), leading their tax bill to rise by £4,000. That person will have paid the usual 40 percent higher rate tax on their earnings between £100,000 and £120,000, amounting to £8,000. Add this to the £4,000 due to the loss of personal allowance and they will have paid £12,000 on the £20,000 of earnings between £100,000 and £120,000. That gives an effective tax rate of 60 percent.

What happens if your earnings are above £125,140?

Your personal allowance is fully depleted at the point when your income reaches £125,140. Above this amount, you do not get a personal allowance. But incomes above £125,140 are taxed at the additional rate of 45 percent.

So your effective tax rate jumps from 40 percent to 60 percent for incomes between £100,000 and £125,140 and then falls back to 45 percent?


That’s an anomaly…

Yes, it is.

Is there a way to avoid the effective 60 percent rate?

Absolutely. You can put up to £60,000 a year of your earnings above £100,000 into a pension, subject to the exclusions referenced earlier. You are not taxed on money you put into a pension, so you will avoid the effective 60 percent tax.

How does that work?

If you are earning £120,000 and you put all of your earnings above £100,000 into your pension, then your earnings above £100,000 will no longer be taxed. This means you will no longer have to pay the effective 60 percent tax you would otherwise have done. Instead, it goes straight into your pension.

So, in this case, putting your income into your pension could leave you significantly better off overall?

Quite so. But there’s more. If your employer operates a salary sacrifice scheme, then you could make even greater savings (assuming you won’t breach your maximum £60,000 annual pension allowance).

How does salary sacrifice operate?

Your employer has to pay national insurance based on your salary. If your employer reduces your salary by exactly the same amount that you want to put into your pension, and then pays your pension contributions for you, then they will now have to pay less in national insurance. If your employer adds this national insurance saving to your pension, then you are even better off financially. In this case, you could gain almost 67 percent (2).

So should everyone consider putting their income between £100,000 and £125,140 into a pension?

Not necessarily. To start with, you can only obtain tax relief on up to £60,000 a year on any pension contributions. Until 6 April 2023, you could not put more than £1,073,100 into a pension over the course of your lifetime without being subject to a tax charge on any funds in excess of this figure. So there were limits to your pension investment. However chancellor Jeremy Hunt effectively removed the lifetime allowance in his March 2023 budget, so there is currently no limit to how much you can put into a pension over your lifetime. But be mindful that whether this is the right thing to do will depend on your personal circumstances.

What if I won’t exceed the £60,000 annual limit?

You need to consider your broader life goals and financial objectives and create a financial plan to help you aim to achieve them. If investing this income into a pension could help you achieve your aims, then it may be worth pursuing, however as with all investments this will come with risks. Even so, we would recommend you review annually any pensions you have and consider how they link in with your long-term objectives. In addition, while pensions may be the first avenue to consider regarding the effective 60 percent tax rate, they are not the only option.

What are the other considerations?

Again it will entirely depend on your individual circumstances. But when giving holistic advice to a high earner we would also consider other tax-efficient vehicles, such as ISAs and venture capital trusts, which may well be appropriate. You may find speaking to a financial adviser helpful here, as they can look at the bigger picture.


(1), ‘Your salary taxed at 60 percent – the six-figure curse’, 19 February 2016.

(2), ‘Relief rate will be over 66 percent for salary sacrifice’, 10 December 2009.

Important information

The income tax rates quoted in this article relate to England, Wales and Northern Ireland. The rates in Scotland are different.

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or part) without our prior written consent.

The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors might not get back their initial investment.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

The retirement benefits you receive from your pension plan depend on a number of factors including the value of your plan when you decide to take your benefits which isn't guaranteed and can do down as well as up. The benefits of your plan could fall below the amount(s) paid in.

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