Planning pension contributions comes to the fore in the months leading up to each 5 April. The key rule is simple: you can contribute up to the lower of 100% of your relevant UK earnings or £60,000 (the annual allowance). This includes your own contributions, employer contributions, and tax relief added by HMRC.
What counts as relevant UK earnings?
Relevant UK earnings include:
- Salary, wages, bonuses, overtime, commission
- Taxable benefits in kind
- Employer pension contributions (these count towards your earnings figure for the limit)
- Self-employed taxable profits
- Redundancy payments above the £30,000 tax-free amount
- Certain other income such as patent royalties and excess redundancy payments
Excluded items:
- Dividends
- Rental income
- Pension income
Special cases and allowances
- Low earners: If you earn less than £3,600, you can still contribute up to £3,600 gross (£2,880 net plus £720 tax relief).
- Money purchase annual allowance: If you’ve accessed your pension flexibly, your allowance drops to £10,000.
- Carry forward: You can use unused allowance from the previous three tax years, potentially allowing contributions of up to £220,000 (2022-23 annual allowance £40,000) if you have sufficient earnings.
High earners and tapered annual allowance
If your income is very high, your annual allowance may be reduced:
- Threshold income: This is your total taxable income excluding employer pension contributions and certain reliefs. If this exceeds £200,000, you may be affected.
- Adjusted income: This is your total taxable income including employer pension contributions. If this exceeds £260,000, your annual allowance is tapered down by £1 for every £2 over £260,000, to a minimum of £10,000.
Example:
- Threshold income = £210,000
- Adjusted income = £280,000
Annual allowance reduces by £10,000 (because £20,000 over £260,000 ÷ 2 = £10,000), leaving £50,000 allowance.
Do sole trade or partnership losses reduce relevant earnings?
No. Losses offset against total income for tax purposes do not reduce relevant UK earnings for pension contribution limits. The calculation is based on gross earnings before reliefs, not net income after loss claims.
Owner managers and charity/social enterprise CEOs
If you run a company or lead a charity/social enterprise, you can choose to be paid partly or wholly through employer pension contributions instead of salary. These contributions count towards your relevant UK earnings figure, allowing you to maximise pension funding while potentially reducing income tax and National Insurance.
Tax relief on contributions
Basic rate relief is added automatically by your provider. Higher and additional rate taxpayers claim extra relief through Self Assessment.
If you’re unsure about your maximum pension contribution, how high earner rules apply, or how to structure payments as an owner manager or charity CEO, contact Green Accountancy today. We’ll help you optimise your pension planning and ensure you stay within HMRC rules.