Updated: December 15, 2022
Salary Sacrifice Pension for Higher-Rate Taxpayers
Learn all about the tax rules for higher rate taxpayers in a salary sacrifice pension scheme in this comprehensive guide.
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Author: Tony Stevens - Finance Expert
Updated: August 29, 2019
Schemes which allow salary sacrifice to make pension contributions tend to be available for earners at all levels, both low and high. This means that many higher-rate taxpayers are likely to agree to salary sacrifice pension schemes. However, due to the tax rules implemented in 2015, there are now limits as to how much of their pension contributions are subject to tax relief.
If you’re a higher taxpayer and wish to join your company’s scheme for salary sacrifice in order to get pension contributions, it can help to understand the rules around tax relief, limits and tapering. This can ensure you’re saving for retirement in the most tax efficient way possible.
With complex tax rules such as higher-rate taxpayer tapering pension tax relief, it can help to speak with an experienced pension advisor, like the ones we work with. However, we also know that before you speak with an expert it can feel good to go in with some knowledge of the topic and that’s why we’ve written this article.
In it we’ll discuss:
The following topics are covered below...
What are the rules for salary sacrifice pension for higher-rate taxpayers?
Since 2015, there have been new rules for higher-rate taxpayers and tax relief treatment of their pension contributions, including through salary sacrifice. While basic-rate taxpayers receive tax relief on a maximum of £40,000 per year of their total pension contributions, for higher-rate taxpayers there is an upper earnings limit. When they surpass that, their pension tax relief levels begin to reduce.
For those who earn a net income of over £110,000, they will lose tax relief on £1 for every £2 of their income that exceeds that £110,000 of net income (or £150,000 of adjusted income, including pension contributions).
The maximum amount of tax relief that can be deducted is £30,000 of pension payments made through salary sacrifice or other means. Higher-rate taxpayers will always receive tax relief on £10,000 of their salary sacrifice pension payments.
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How much tax relief will I get on my salary sacrifice pension contributions as a higher-rate taxpayer?
If you pay into a pension through salary sacrifice, or any other means, as a higher-rate taxpayer that doesn’t mean you automatically lose all tax relief as soon as you pass the higher tax rate threshold.
If you earn over £50,000 but under £110,000, you will continue to receive tax relief on pension contributions of up to £40,000 per year. That’s the same for salary sacrifice pension schemes and other types of pensions.
However, as a higher rate taxpayer, you begin to lose some of your pension tax relief once your net income goes over £110,000.
What is tapering in relation to higher rate taxpayers pension contributions?
Tapering of pension tax relief for higher rate taxpayers is where the amount of tax relief you receive on your pension contributions through salary sacrifice (or other schemes) begins to reduce in relation to how far above £110,000 your annual net income rises.
Your pension tax relief reduces by £1 for every £2 your net income rises above £110,000. For example, if your net income is £135,000, then you will only receive tax relief on pension contributions, including through salary sacrifice, on £38,750, rather than £40,000.
This rises at the same rate of losing tax relief on £1 of your pension contributions for every £2 your net annual income rises above £110,000 until a maximum of £30,000 of tax relief is lost, where you earn £170,000 or more. All higher-rate taxpayers will continue to receive tax relief on £10,000 of their pension contributions, regardless of how much they earn per year.
However, that isn’t the only factor that is taken into consideration when attempting to secure the most tax efficient way to save for your retirement while also maximising your current income.
That’s why speaking with a pension expert, like those we work with, can prove very helpful when you’re considering contributing to a salary sacrifice pension scheme as a higher-rate taxpayer.
Speak with an expert on salary sacrifice and pensions
If you’re a higher-rate taxpayer who’s interested in joining your employer’s scheme to get a salary sacrifice in order to make pension contributions, speak with a fully qualified and experienced pension advisor. They can answer all your questions relating to salary sacrifice pension contributions, pension tax relief, tax planning and retirement planning as a higher-rate taxpayer.
Call us on 0808 189 0463 or fill in our online enquiry form here.
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About the author
Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.
Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.