Example showing the benefits of a pension contribution which reduces a client’s adjusted net income to £100,000

Stephen who lives in Manchester has net income of £120,000. If he pays a pension contribution of £20,000 gross then his adjusted net income for personal allowance purposes will be £100,000.

Without a pension contribution Stephen's personal allowance is £2,570 and taxable income after personal allowance is therefore £117,430. This is taxed as follows:

Payment of the pension contribution will restore Stephen's personal allowance to the full £12,570. His taxable income after personal allowances of £107,430 is taxed as follows:

The tax relief on his pension contribution is therefore £4,000 + (£39,432 - £31,432) = £12,000 which equates to an effective rate of 60%.

Stephen's net income after tax, pension contribution and National Insurance is as set out below. National Insurance is calculated using the ‘Effective Annual Threshold’ of £11,908 which refers to the Primary Threshold level if the weekly level was applied for a full year. This is based on the Primary Threshold being £9,880 from 6 April 2022 until 5 July 2022, and then £12,570 from 6 July 2022 until 5 April 2023.

If Stephen entered into a salary sacrifice arrangement with his employer then a higher pension contribution could be made by his employer due to the NI saving as follows. For further information on salary sacrifice see the article Salary Sacrifice.

Stephen's reduction in salary from £120,000 to £98,855 means an employer pension contribution of £21,145 could be made. If the employer also contributed the 15.05% employer NIC saving then an additional £3,183 could be paid giving a potential employer contribution of £24,328.