A finance expert has revealed how high earners can make a pension contribution of £220,000 this year via an HMRC provision – but time is running out to take advantage of it. Doing so is desirable for earners in the top tax brackets, as the entire £220,000 is subject to tax relief.
This is achieved through a mechanism known as carryover rules, which taxpayers can take advantage of provided they haven’t used their annual allowance (AA) for pension contributions in the past three tax years. It means those eligible for it can significantly reduce the amount of income tax they pay this year, whilst boosting their pension pot. But it only applies to people in particular circumstances financially.
Emma Sterland, chief financial planning officer at UK wealth manager Evelyn Partners, explained: “The highest earners – those with a threshold income over £200,000 – can face a big disadvantage in pension saving because the amount of tax relief they can claim is usually limited by a gradual tapering of their annual allowance.”
The wealth management firm explained that this “tapered annual allowance” will affect anyone who has a “threshold income” in excess of £200,000, and it kicks in when “adjusted income” tops £260,000.
Above £260,000, these high earners will see their Annual Allowance (AA) drop by £1 for every £2 over the threshold.
Those who reach £360,000 and above become subject to the minimum tapered AA of £10,000.
Emma said: “Even though the minimum amount that a high earner can contribute to pensions under the tapered annual allowance was raised to £10,000 from April 2023 (from £4,000), this still means they are very restricted in the amount of tax-relieved contributions they can make into a pension – at just a sixth of the amount of those not subject to the taper.”
Laying out how high earners can put £220k away for a rainy day, using carry forward, Emma explained that the annual allowance is £60,000 for 2025/26 and has been the same in the previous two years, but for 2022/23 it was £40,000.
“That affords a theoretical maximum contribution of £220,000 that can be paid into a pension in this tax year for those entitled to four years of the full AA, and whose relevant earnings in this tax year allow it (and subject to having had a personal pension in place already for those years),” she added.
However, Ms Sterland explained that there are various rules and restrictions to consider if you’re looking to carry forward in this way.
Firstly, you have to have used up the current year’s allowance, so the first step is to obtain an accurate reading of this year’s contributions and take those to the limit.
Secondly, you will need to have had a pension in each of the three previous tax years, but you don’t need to have made any contributions, and the new contributions don’t have to be deposited into the same pension.
Once you’ve met the limit of the current year allowance, “allowances from the ‘oldest year’ of the previous three are used up first and at the end of every tax year, the oldest year falls away”, Ms Sterland explained.
“Therefore, any allowances not used from the oldest year, now 2021/22, will be lost for good if they are not carried forward.
“To get tax relief on pension contributions that you make yourself, you need to ensure that the payments made in any tax year do not exceed relevant earnings in that year. An employer is not restricted by an individual’s earnings so they are able to pay in higher sums.”
It would also all have to be completed by the end of the current tax year, April 5, 2026.
But Ms Sterland cautioned anyone looking to use the mechanism to seek professional advice. She said: “If you think you’re subject to the taper but would like to maximise pension contributions for the tax year, then you really should speak to a financial planner because the calculations for adjusted and threshold incomes can be very involved – as can the possible steps to remain the ‘right side’ of such thresholds.”
