Avoiding 60% marginal tax rate

in Cutting tax
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Pat38493Pat38493 Forumite
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Hi,

If I am earning above 100K, and I have already put the maximum pension allowance 40K into my pension, can I avoid the 60% rate but paying more into the pension, or will my personal allowance still be withdrawn?

In other words if I paid say 60K into the pension, would the additional taxable 20K of pension contributions only be subject to 40% tax or the full 60% by withdrawing personal allowance?


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  • Grumpy_chapGrumpy_chap Forumite
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    Do you have any carry-forward allowance for pension contributions?

    You can also reduce the tax liability by making Gift Aid donations.
  • Pat38493Pat38493 Forumite
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    Do you have any carry-forward allowance for pension contributions?

    You can also reduce the tax liability by making Gift Aid donations.
    Yes I'm aware of that but if I have used up all the carryover, do I still lose my personal allowance if I pay more than my allowance into the pension or will I only pay 40% on it?
  • Jeremy535897Jeremy535897 Forumite
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    This is a terrible idea, because if you exceed your allowance, you get no tax relief on the extra contribution (so you remain in the 60% "band"), and you pay tax on the excess as well (although it may be possible to have that paid out of the pension pot). See:
    https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/the-annual-allowance
  • jwbucklandjwbuckland Forumite
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    I am in a similar position. After fully using pension allowances, If your company offers salary sacrifice on (electric/hybrid) lease cars, it’s worth checking it out,  it will give you a 63% saving on the lease costs. 
  • Pat38493Pat38493 Forumite
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    This is a terrible idea, because if you exceed your allowance, you get no tax relief on the extra contribution (so you remain in the 60% "band"), and you pay tax on the excess as well (although it may be possible to have that paid out of the pension pot). See:
    https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/the-annual-allowance
    Hi - thanks for that, so you are saying that effectively I would pay a "fine" for putting too much money in as I would end up paying the 60% tax that I would have paid anyway, plus another 40% on the rest for the overspend, so most of the money would actually disappear?  Or am I not understanding you correctly?
  • This is a terrible idea, because if you exceed your allowance, you get no tax relief on the extra contribution (so you remain in the 60% "band"), and you pay tax on the excess as well (although it may be possible to have that paid out of the pension pot). 
    Hello Jeremy.  I think that you do a great job helping people on here but this is not right where the personal allowance is tapered.  You might want to look at the actual legislation for:

    1. How income tax relief is provided for pension contributions.

    2. How the annual allowance charge works in a different way to how normal income is taxed.

    3. How the personal allowance taper is not impacted by an annual allowance charge.

    As you say, scheme pay can mitigate things further (as can the contribution being made by the employer through salary sacrifice because of the employee NIC savings).

    The proximity of the individual to the lifetime allowance and their expected tax rates on retirement can also make quite a difference.  For example, it is very unlikely to be appropriate if the individual is well above the LTA already.


  • Jeremy535897Jeremy535897 Forumite
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    This is a terrible idea, because if you exceed your allowance, you get no tax relief on the extra contribution (so you remain in the 60% "band"), and you pay tax on the excess as well (although it may be possible to have that paid out of the pension pot). 
    Hello Jeremy.  I think that you do a great job helping people on here but this is not right where the personal allowance is tapered.  You might want to look at the actual legislation for:

    1. How income tax relief is provided for pension contributions.

    2. How the annual allowance charge works in a different way to how normal income is taxed.

    3. How the personal allowance taper is not impacted by an annual allowance charge.

    As you say, scheme pay can mitigate things further (as can the contribution being made by the employer through salary sacrifice because of the employee NIC savings).

    The proximity of the individual to the lifetime allowance and their expected tax rates on retirement can also make quite a difference.  For example, it is very unlikely to be appropriate if the individual is well above the LTA already.


    Yes, it appears that you continue to get tax relief, even when you know the contributions are excessive. It seems illogical, and perhaps if you are a long way off retirement, you might take the risk, but it seems a bit of a desperate and complicating thing to do. No doubt you will say whether you agree.

    What OP really needs is a spouse with a little (but commercial) business that really needs a new van. OP becomes a partner in it, takes 99% of the profit share for the year, and use the amount of loss the AIA creates against the salary. Yes, it is more complicated than that, but it's a lot more tax efficient.
  • edited 15 August 2022 at 1:20PM
    Pat38493Pat38493 Forumite
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    edited 15 August 2022 at 1:20PM
    This is a terrible idea, because if you exceed your allowance, you get no tax relief on the extra contribution (so you remain in the 60% "band"), and you pay tax on the excess as well (although it may be possible to have that paid out of the pension pot). 
    Hello Jeremy.  I think that you do a great job helping people on here but this is not right where the personal allowance is tapered.  You might want to look at the actual legislation for:

    1. How income tax relief is provided for pension contributions.

    2. How the annual allowance charge works in a different way to how normal income is taxed.

    3. How the personal allowance taper is not impacted by an annual allowance charge.

    As you say, scheme pay can mitigate things further (as can the contribution being made by the employer through salary sacrifice because of the employee NIC savings).

    The proximity of the individual to the lifetime allowance and their expected tax rates on retirement can also make quite a difference.  For example, it is very unlikely to be appropriate if the individual is well above the LTA already.


    OK wait - so actually my original theory was correct - if I over contribute to the pension, income which would have been effectively taxed at 60% may in fact only end up being taxed at 40% (and potentially up to a year later)?

    I am not in this situation yet but I expect to be in it in about 3 years from now.

    Also I am aware of the LTA risks as well - I am not yet close to the LTA.
  • EdSwippetEdSwippet Forumite
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    Pat38493 said:
    OK wait - so actually my original theory was correct - if I over contribute to the pension, income which would have been effectively taxed at 60% may in fact only end up being taxed at 40% (and potentially up to a year later)?
    ...
    Also I am aware of the LTA risks as well - I am not yet close to the LTA.
    Whichever way it falls out, make sure you have also factored in that your pension contribution will be taxed a second time when withdrawn. Let's suppose you pay £100 above the AA into your pension, and pay a £40 tax charge on that. Using 'schemes pays' -- and you should always use this whenever you can -- leaves £60 remaining in the pension.

    If in basic rate on withdrawal, and assuming you are below the lifetime allowance, you get £15 tax free and 80% of £45, for a return on your £100 of £51. This is better than the £40 from the effective £60 band. So far so moderately good, although an effective tax rate of 49% is hardly cause for celebration. If in higher rate tax, you get £15 tax free and 60% of £45, for a return of £42. That £2 difference is paltry compensation for giving up use of this money until age 55/57.

    Over the lifetime allowance, numbers become horrible. The effect here is that you simply lose the 25% tax free, and the government takes that instead in LTA penalty. So, £36 back from £100 if in basic rate tax on withdrawal, and £27 back from £100 if in higher rate tax. Both worse than taking the money now at effectively 60% tax.

    I'll leave you to work out these scenarios if you do not (or perhaps cannot) use 'scheme pays'. The results in this case are universally poor, and I'd suggest that you should avoid them.

    Have you considered cutting down your work hours instead?

  • Pat38493Pat38493 Forumite
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    EdSwippet said:
    Pat38493 said:
    OK wait - so actually my original theory was correct - if I over contribute to the pension, income which would have been effectively taxed at 60% may in fact only end up being taxed at 40% (and potentially up to a year later)?
    ...
    Also I am aware of the LTA risks as well - I am not yet close to the LTA.
    Whichever way it falls out, make sure you have also factored in that your pension contribution will be taxed a second time when withdrawn. Let's suppose you pay £100 above the AA into your pension, and pay a £40 tax charge on that. Using 'schemes pays' -- and you should always use this whenever you can -- leaves £60 remaining in the pension.

    If in basic rate on withdrawal, and assuming you are below the lifetime allowance, you get £15 tax free and 80% of £45, for a return on your £100 of £51. This is better than the £40 from the effective £60 band. So far so moderately good, although an effective tax rate of 49% is hardly cause for celebration. If in higher rate tax, you get £15 tax free and 60% of £45, for a return of £42. That £2 difference is paltry compensation for giving up use of this money until age 55/57.

    Over the lifetime allowance, numbers become horrible. The effect here is that you simply lose the 25% tax free, and the government takes that instead in LTA penalty. So, £36 back from £100 if in basic rate tax on withdrawal, and £27 back from £100 if in higher rate tax. Both worse than taking the money now at effectively 60% tax.

    I'll leave you to work out these scenarios if you do not (or perhaps cannot) use 'scheme pays'. The results in this case are universally poor, and I'd suggest that you should avoid them.

    Have you considered cutting down your work hours instead?

    Thanks for the very informative post.

    Cutting working hours instead is also an option I guess, although in the type of job I am in, this might be easier in theory than in practice as I doubt anyone else would do my work in the meantime and it still needs to be done, but definitely worth considering.

    I guess donating money to charity is also an option which depending on your point of view might be preferable to having it taxed at 60%.

    I have to admit I'm not too clear on why "scheme pays" or not makes any difference - wouldn't I end up paying the same amount of tax either way, either through my tax return or through the scheme - I'm obviously missing something there.
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