Dear Kate,

I have just become a higher-rate taxpayer for the first time and wanted to know how this will affect my employer/employee pension contributions? Will I need to do anything to obtain the additional 20pc tax relief? 

Neil Hibberd, via email

Kate says:

First of all, congratulations on your pay rise. Now that you are a higher-rate taxpayer it’s important that you receive the full benefit of this in respect of your personal contributions. 

Pension savers are entitled to pension tax relief based on their highest rate of income tax. This is known as “deferred taxation” and is a reward for you locking money away in a pension to provide you with a future retirement income. As you’re now a higher-rate taxpayer, you could be entitled to tax relief at 40pc on some, or all, of your pension contributions. 

As you’ve mentioned employer contributions, I’ve assumed that you’re saving in a workplace pension scheme. Becoming a higher-rate taxpayer doesn’t affect the tax position of your employer pension contributions. Pension contributions aren’t counted as benefits in kind, such as medical insurance or company cars. 

Amount of pension tax relief 

The tax relief you’ll receive depends on your total personal contributions and your total income in the tax year. To get 40pc tax relief on all your personal contributions your salary needs to be high enough to support this.

For example, if you’re an English taxpayer earning £55,000 a year, you’ll pay 40pc tax on the amount above the higher-rate tax threshold of £50,270, so on just under £5,000 of your earnings. If you make a £10,000 gross annual contribution, you’ll receive 40pc tax relief on just under £5,000 and 20pc relief on the rest. 

The maximum amount you can save into a pension annually, without incurring a tax charge, is usually £40,000. This is called the annual allowance, and includes all contributions made by you, your employer and any third party on your behalf. I’ve assumed you haven’t accessed any pension benefits flexibly, meaning the lower money purchase annual allowance of £4,000 doesn’t apply to you.

Tax relief on your own contributions is limited to the greater of 100pc of your relevant UK earnings in the tax year or £3,600 (gross of tax relief).

Pension allowances 

The maximum you can normally pay into a pension is £40,000 a year, which includes your contributions, those paid by your employer or by a third party, without incurring a tax charge. This may be less if you’re a high earner, or have flexibly accessed your pension, where your annual allowance could be as low as £4,000. 

Your own (and any third party) contributions are limited to tax relief on the greater of 100pc of your taxable earnings or £3,600 gross in a tax year.

Unlike Isas it’s possible to “carry forward” unused pension allowances available from the previous three tax years, providing you haven’t flexibly accessed your pension. You must have been a member of a registered pension scheme for each of the tax years you wish to carry forward from. Tax relief on your personal contributions will only be available up to 100pc of your earnings (or £3,600 gross, if greater) in the current tax year even where carry forward is being used. 

The maximum you could pay in this tax year without being subject to a tax charge and using carry forward is £160,000 (£40,000 for this tax year, plus £40,000 for each of the previous three tax years), including basic-rate tax relief. This can only be achieved if you have earnings of at least £160,000 in this tax year, and no pension contributions have already been paid into your pension in this tax year or in any of the previous three years.