Pension Tax Planning for High Earners


With successive governments increasing the tax burden for high earners over the years, you are not alone if you feel you’re paying more and more tax. Higher and additional rate taxpayers now pay about two thirds of all income tax. More than one in seven income tax payers are currently taxed at the higher or additional rate and the proportion will increase significantly following the freezing of tax allowances and bands until April 2026, with no guarantees beyond that. The thresholds for phasing out the personal allowance and the start of the additional rate tax have both been unchanged since they came into force in April 2010.

In England, the point at which you start to pay 40% income tax is £50,270 for 2021/22 and 2022/23 having increased at less than the rate of inflation over the past ten years. The UK government has announced that thresholds will not rise again before tax year 2026/27, bringing around a million more people into higher rate tax and increasing the bills of those already paying it. In addition, there is an increase of 1.25% to national insurance contributions in 2022/23.

Therefore, it is clear to see that if you want to reduce the amount of tax that you pay the solution is in your own hands. Planning could help you to lessen the rising tax burden, this is where Blue Rocket Accounting can help.

This guide explores a key tax planning opportunity; making pension contributions. It also explains how a self-invested personal pension(SIPP) could help you to take control of your pension, and even to develop your business.


Pay less tax now and gain more income later

Pension contributions can offer a particularly effective way to reduce your tax bill whilst also helping you to prepare for retirement so you should make sure you are aware of all the options

The generous tax reliefs successive governments have given to pension arrangements mean that they have long played an important role in tax planning for high earners. However, since April 2011 increasingly tight restrictions have been placed on these reliefs, just as the rising burden of income tax has made them more valuable. The amounts you can pay in and take out without suffering heavy tax charges have been reduced greatly, but pensions continue to offer significant tax benefits. The use of pensions in income tax planning is often divided into two areas: pre-retirement and at-retirement, but there is no direct link between physical retirement; stopping work, and drawing on a pension arrangement. You may draw benefits before retirement and make pension contributions after your working life has ended.

In practice, it is possible to consider three phases:

  • Before age 55 you can pay into a pension but cannot take anything out unless you are in serious ill health.
  • Between age 55 and 74 you can pay in or draw out (or do both at once), which gives you real flexibility to manage your income as you move into retirement.
  • From age 75 you can no longer receive tax relief on pension contributions, but you have a free choice of how much or how little you draw out each year.
  • Pensions can also play an important role in combatting another tax that may concern you and your family: inheritance tax (IHT).


Contribution Planning

Your personal pension contributions normally qualify for income tax relief at your marginal rate. Most commonly, individuals pay 80% of their contribution and the pension scheme claims the remaining 20% from the government. If your highest rate of tax is over 20%, you can claim the balance under income tax self-assessment

Pension contributions reduce your taxable income so they can help you to avoid the phasing out of the personal allowance, which starts at£100,000 of income, resulting in an effective tax rate of up to 60%.

Regardless of your earnings, the maximum contribution to your pensions (excluding any defined benefit schemes) without tax charges falls to just £4,000 once you have started to receive payments from your pensions flexibly. Some exceptions to this rule apply, for instance if you take a tax-free lump sum and buy certain types of lifetime annuity with the remaining fund.


Carry Forward

There are some special rules that may allow you to catch upon the pension contributions you could have made in the previous three tax years. In 2021/22, you can exploit your unused annual allowance dating back to2018/19. This is known as ‘carry forward’. The rules are relatively complicated, but, in theory at least, if your earnings are high enough and you have not paid into a pension in recent years, it would be possible to make up to £160,000 of pension contributions in 2021/22 with full tax relief. This facility may be particularly helpful for those who have had to reduce pension contributions during the Covid-19 pandemic.

Salary Sacrifice

Whether or not you wish to maximise your pension contributions, it is well worth spending some time on the payment arrangements .If you are an employee, then you (and your employer) can save national insurance contributions (NICs). The secret is for you to reduce your salary or your bonus and ask your employer to use the money, including the NIC saving, to make the pension contributions for you. The technical name for this is salary or bonus sacrifice and it is perfectly legal, if you do it correctly. If you pay higher or additional rate income tax, the result could be an increase of around 18% in the amount being paid into your pension in 2021/22, increasing to around 22% in 2022/23. Importantly, your cash salary will be reduced and replaced with the pension benefit.

Before adopting this pension contribution route, you should consider the effect this may have on:

  • your ability to borrow money, e.g. for a mortgage;
  • your entitlement to redundancy payments or other benefits, such as statutory maternity pay, working tax credit or child tax credit;
  • any life insurance or income protection where the amount paid is linked to your salary.


Self-Invested Personal Pension – Taking control of your pension investments

SIPPS Pension schemes and providers generally offer a wide range of investment funds, which meet the needs of most people. However, if you have already saved a substantial amount, a self-invested personal pension(SIPP) offers you the opportunity to take control of your pension investments. A SIPP gives you a much wider choice of investments to suit your priorities and preferences, and if you have your own business you may be able to use your pension to help develop it tax-efficiently. For example, you can hold commercial property and company shares in a SIPP, or you can build up a portfolio of investments. A SIPP also offers a flexible and tax efficient way to turn the pension fund you have accumulated into an income for your retirement.

What is a SIPP?

A SIPP is a special form of personal pension that allows you, as the pension scheme member, to choose and control the investments within your pension plan. SIPPs are offered by most of the major providers, including investment platforms, insurance companies and specialist pension firms. The benefits that you can draw from a SIPP and the contributions that can be made are subject to the same rules as any personal pension. The key differentiator is the range of investments available. These vary among providers, with insurance companies typically offering a more limited range that will suit most investors, while specialist providers may offer the full range.

Typically, investment options include:

  • a wide range of investment funds
  • direct investment in stocks and shares
  • cash deposits
  • commercial property

Whilst SIPPs allow a large range of investments, some options may not be appropriate for you such as direct investment in overseas property or derivatives.

A key consideration is ensuring that your investment portfolio balances risk and reward in a way you are comfortable with.


Consolidating your pensions in a SIPP

Many of us build up several different pensions over the years. Some pension funds may still be with former employers, while others are those we have saved ourselves. Some may have high charges and under-performing investments.

Consolidating old pensions into a SIPP can reduce charges and allow investments to be made that meet your needs better.


Commercial property investment

A major attraction of SIPPs is that certain types can invest in commercial property. Commercial property can be let to the pension scheme member’s company or partnership. You can even sell a property that you or your business owns to the pension scheme (although this might result in a tax charge on any capital gains). Any sale transaction must use an arm’s length valuation, because there are tax penalties for ‘value shifting’, for example under valued sales to your pension scheme. Similarly, the business must always pay a full commercial rent, which the SIPP will receive tax free

SIPPs that hold commercial property as an investment normally have higher annual charges than simpler pension arrangements with investments in listed securities, collective funds and cash


Specialised investments and taxable investments

In theory, almost any investment can be held in a SIPP, but those that are not approved by HM Revenue & Customs are subject to heavy tax charges that make them unattractive. They are known as ‘taxable property’ and include, for example, residential property, works of art, antiques, fine wine and other collectibles.


Withdrawing money from your pension

Since 6 April 2015, the rules have provided much greater flexibility once you reach the minimum pension age of 55 (which increases to 57in 2028). There are no restrictions on how much income you can take each year from drawdown, and you can take 25% of your pension funds as a tax-free lumpsum at the start, with subsequent withdrawals taxed as income. There are also no restrictions on withdrawals from a pension, but the first 25% you take is tax free and the remainder is taxed as income. The best way to structure withdrawals from your pension will depend on your personal circumstances.

With the events of the last couple of years putting many people under financial strain, it might be tempting to start or increase pension withdrawals. However, withdrawals made now could significantly reduce income available in the future. Careful consideration is needed of what level of withdrawal may be appropriate, and what investments should be encashed to provide it. It may be a good time to review your pension investments to ensure they are appropriately diversified. You also need to be aware that starting to withdraw income flexibly restricts future pension contributions to a maximum of£4,000 a year before suffering tax charges. Professional advice is essential to avoid potential pitfalls.

We can give guidance on how you might take lump sums and income from your pension, including ways to combine them with other income sources, how to structure your investments, what happens if you die and when it may be beneficial to buy guaranteed income through an annuity. We can also help you understand how you can take advantage of flexibility available now.


Speak to Blue Rocket Accounting

Pension planning is complicated, and has been made even more so by constant changes to the rules. We make it our business to stay up-to-date with the latest developments, and to help clients take full advantage of the available tax breaks.

We can offer guidance on:

  • Assessing your financial priorities and recommending a tailored retirement planning strategy.
  • Maximising pension contributions, using carry forward where appropriate.
  • Advising whether salary sacrifice could increase the amount invested in your pension at no extra cost to you or your employer.
  • The appropriateness of a SIPP, and the right investment strategy.
  • Transferring existing pension arrangements into your new pension arrangement.
  • Managing the move from saving to withdrawing from your pension.
  • Minimising IHT liabilities after your death.


Speak to us today to find out how we can offer guidance tailored to your personal circumstances. Call us on 01322 555442 or email

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