RECOVERING THE PERSONAL ALLOWANCE

 

Individuals with taxable income of more than £100,000 lose £1 of personal allowance for every £2 earned.   This means that any individual whose income exceeds £120,000 in the tax year 2014/15 effectively loses their entire personal allowance (£10,000).  This can be offset by paying a pension contribution.

Example:

In 2014/15 Boris has income of £120,000 all of which consists of earnings and interest.  He is considering making a £20,000 gross pension contribution.  Depending upon whether he makes the pension contribution or not, his tax bill would be as follows:

	No Pension Contribution	Pension Contribution
Gross Income	£120,000	£120,000
Pension Contribution	£0	£20,000
Personal Allowance	£0	£10,000
Taxable Income	£120,000	£90,000
Basic Rate Tax	£31,866 @ 40% = £6,373	£31,866 @ 40% = £6,373
Higher Rate Tax	£88,034 @ 40% = £35,253	£58,134 @ 40% = £23,253
Total Tax	£41,626	£29,626

Thus a gross pension contribution of £20,000 will save Boris £12,000 in tax, an effective 60% rate of relief.

If you wish to discuss making a pension contribution, please contact Ward Williams Financial Services Ltd on 01932 830664 or email wwfs@wardwilliams.co.uk.

www.wardwilliamsfs.co.uk