Pension Tax Relief Over £100,000, Restore Your Personal Allowance

The £100k Trap

The personal allowance (£12,570 for 2026/27) is gradually withdrawn for individuals whose adjusted net income (ANI) exceeds £100,000. The allowance reduces by £1 for every £2 of ANI above £100,000. It reaches zero at £125,140. While the allowance is being withdrawn, every £2 of additional income triggers £1 of lost personal allowance, meaning that £2 of income is taxed twice, once normally and once because the allowance reduction exposes previously exempt income to tax at 40%. The effective marginal tax rate in the £100,000–£125,140 band is therefore 60%, not 40%.

This is sometimes called the '60% trap' or the '£100k tax trap'. An employee earning exactly £100,000 who receives a £1,000 pay rise pays 40% income tax on the £1,000 (£400) plus an effective additional 20% on the lost allowance (£500 of previously allowance-sheltered income becomes taxable at 40% = £200). Total extra tax: £600 on a £1,000 income increase, a 60% effective rate.

How Pension Contributions Reduce Adjusted Net Income

Pension contributions, whether under relief at source, net pay arrangement, or salary sacrifice, reduce adjusted net income. Under relief at source, the gross contribution reduces ANI directly. Under salary sacrifice, the sacrificed salary never enters ANI in the first place. Either way, a £10,000 pension contribution for someone with £110,000 ANI reduces ANI to £100,000, restoring the full personal allowance.

The ANI reduction is the key mechanism. HMRC uses ANI to calculate the personal allowance, the High Income Child Benefit Charge, and 30-hour free childcare eligibility. Pension contributions are one of the few reliefs that reduce ANI, gift aid donations are another. Other expenses and deductions do not reduce ANI in the same way.

Worked Example: £115,000 Income, £15,000 Pension Contribution

Consider someone with £115,000 salary and no pension contributions. Their ANI is £115,000. Personal allowance tapered to: £12,570 − (£115,000 − £100,000) / 2 = £12,570 − £7,500 = £5,070. Taxable income: £115,000 − £5,070 = £109,930. Income tax at 40% on the portion above the basic-rate band (£50,270): 40% × (£109,930 − £37,700) = 40% × £72,230 = £28,892 (plus basic-rate tax on the £37,700).

Now add a £15,000 gross pension contribution (relief at source). ANI drops to £100,000. Personal allowance restored to full £12,570, saving 40% × (£12,570 − £5,070) = 40% × £7,500 = £3,000. Additionally, the £15,000 that falls within the 40% band saves 40% × £15,000 = £6,000 in income tax directly. Part of this falls within the PA-withdrawal zone (the 60% effective rate zone), so the actual saving is greater. Total income tax saving from the £15,000 contribution: approximately £9,000. Net cost of a £15,000 pension contribution: approximately £6,000. That is a 60% effective subsidy from the tax system.

The Annual Allowance Cap

You cannot make unlimited pension contributions to escape the £100k trap. The pension annual allowance of £60,000 (or 100% of earnings if lower) applies. For someone with persistent income between £100,000 and £125,140, the maximum annual contribution in the current year is £60,000. Carry-forward allowance from prior years can increase this if unused allowance is available, potentially allowing a one-off very large contribution in a year when income is particularly high.

For regular earners consistently in the £100,000–£125,140 range, the strategy is straightforward: contribute enough to pension each year to bring ANI to exactly £100,000, restoring the full personal allowance. This is often a contribution of between £5,000 and £25,140 depending on exact income. Any contribution above that amount still saves at the standard 40% rate on the excess, which is still highly efficient.