Earn Over £100k? How To Reclaim Your Personal Allowance [Guide] :: Drewberry™ (2024)

Income Tax and the Personal Allowance

In England, Wales and Northern Ireland (income tax is devolved to the Scottish Parliament and so the rates are different), the income tax rates for the 2023/24 tax year are as follows:

Note that you begin to lose your personal allowance by £1 for every £2 that youradjusted net income is above £100,000, which means your personal allowance is zero if your income is £125,140 or above. It’s here you start to pay a considerable amount of income tax.

What Can I Do to Reclaim My Personal Allowance?

An ‘approved’ method of reclaiming the personal allowance is to make a pension contribution to take your income to below the threshold at which you start to lose your personal allowance.

If possible, the most tax-efficient method for both employer and employee is to have the employer make a contribution on the employee’s behalf.

Exchanging taxable income for a corresponding employer pension contribution allows you to reclaim your personal allowance and make income tax savings at your highest marginal rate.

Try our Pension Tax Relief Calculator below to see how much you could save.

Incomes of £100,000+ Sees Personal Allowance Taper Towards £0

For the tax year 2023/24 the personal allowance is £12,570, above which income tax needs to be paid. As such, those earning £125,140 or more per year have no personal allowance left to use. This means that some people effectively pay almost 60% tax on income between £100,000 and £123,000.

• For each £2 earned over £100,000, £1 is taken off your allowance, until the allowance reaches £0.
• If your gross income falls below £100,000 you can reclaim your full personal allowance.

Reclaiming Your Personal Allowance

An ‘approved’ method of reclaiming the personal allowance is to arrange with your employer for them to reduce your PAYE salary in exchange for a corresponding employer pension contribution.

Below is an example of someone earning £123,000 who makes no pension contributions. The alternative is for their employer to make a pension contribution of £23,000 and pay a salary of £100,000. This option is known as salary sacrifice or salary exchange.

PAYE Employees With No Pension Contributions

Reduce Income By Having The Employer Make A £23,000 Pension Contribution

In this example, for an employer pension contribution of £23,000, the difference in take home pay is only £8,740. In addition, the employer also saves £2,898 in employer National Insurance contributions, as they don’t need to pay this on employer pension contributions. A generous employer may also pay the amount saved into the pension arrangement.

What to Consider When Reclaiming Your Personal Allowance

This example is based on a salary of £123,000 where an individual loses the majority of their personal allowance, and subsequently reclaims the full allowance by taking a proportion of their salary in an employer pension contribution.

The example does not take into account the individual’s personal circ*mstances or the need to make retirement provisions, nor does it constitute individual financial advice.

Can Employee Pension Contributions Help Regain the Personal Allowance?

Employee (i.e. personal, not company-sponsored) pension contributions can also be used to reclaim at least some of the personal allowance. However, these contributions do not benefit from the employer and employee National Insurance savings.

Employee pension contributions are paid out of post-tax income, meaning income tax and National Insurance contributions have already been deducted on the cash the employee is investing in the pension.

Although making the personal pension contribution still allows the employee to reclaim their personal allowance, it isn’t possible for either the employer or employee to obtain relief on the National Insurance contributions already paid on the sum the employee decides to invest into their pension.

If you’re a higher-rate taxpayer, you’ll also have to apply for your additional 20% tax relief on the pension contribution by applying to HMRC using a self-assessment tax return.

Moreover, an employer can apply for corporation tax relief as a business expense on pension contributions they make on behalf of their employees, as well as not having to pay National Insurance contributions on the sum invested into a pension. This is because employer pension contributions aren’t PAYE income that goes through payroll.

So while the employee can make pension contributions out of their post-tax income and reclaim their personal allowance, it isn’t as tax efficient for either party as having the employer make the contribution.

Dividend Receiving Directors And The Personal Allowance

This example is based on a director of their own company remunerating themselves with a fairly small salary (£23,000) and the bulk of their income made up of dividends (£100,000).

The individual is a higher rate taxpayer and therefore pays a higher rate of tax on their dividends. Also, as their income is over £100,000, their personal allowance has been reduced to £1,000.

Make A £23,000 Employer Pension Contribution

The individual is a higher rate taxpayer, but their personal allowance has not been reduced as they are putting £23,000 into a pension.

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