Contributing to your pension pot reduces your taxable income and can give you back some or all of your £11,850 personal allowance (2018/19 figure). This allowance is progressively withdrawn once your earnings exceed £100,000. You lose £1 of the allowance for each £2 you earn above £100,000, meaning that the whole personal allowance is wiped out when earnings reach £123,700.
If you’re a higher rate taxpayer with a taxable income of between £100,000 and £123,700, a pension contribution that reduces your taxable income to £100,000 would give an effective rate of tax relief of 60%. For those on higher incomes, or making bigger contributions, the effective rate would be between 40% and 60%.
Pensions and tax can be complex, so it’s a good idea to get some financial advice to find out what’s best for your circumstances.
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