How your pension could help cut your tax rate by over 60%

If you’ve ever moved from one tax threshold to another, you will know just how much difference it can make to what you take home.

As your earnings increase, so does your tax bill, but there may come a point where you are paying more than necessary. Indeed, in some circumstances, the effective tax rate on a portion of your income could reach as high as 62%.

Read on to find out how your pension contributions can help you cut your tax rate.

The 60% tax trap can catch you if you earn over £100,000

In 2026/27, the standard Personal Allowance is £12,570. This is the amount of income most people can receive before paying Income Tax.

However, once your income exceeds £100,000, your Personal Allowance starts to taper by £1 for every £2 over the threshold, and once you reach £125,140, you lose the Personal Allowance altogether.

This means that you can pay an effective rate of 60% Income Tax on your income between £100,000 and £125,140.

For example, say you earned £110,000:

• The £10,000 above £100,000 would be charged at the 40% higher-rate Income Tax (£4,000)

• You would lose £5,000 of your Personal Allowance due to tapering

• That £5,000 would also be subject to higher-rate Income Tax (£2,000)

• You would effectively lose £6,000 of the £10,000 above £100,000 you earned.

National Insurance can then push the effective tax rate even higher. In the 2026/27 tax year, employee National Insurance is charged at 2% on earnings above £50,270.

This means that if you earn over £100,000, you can face an effective tax rate of up to 62% on your earnings within the £100,000 – £125,140 bracket.

Pension contributions can reduce your tax bill

When you pay into a pension, you receive tax relief at your marginal rate on your contributions, provided you don’t exceed your Annual Allowance.

In 2026/27, the Annual Allowance is £60,000 or 100% of your earnings, whichever is lower. You can also carry forward any unused amounts from the previous three tax years. There are circumstances in which the Annual Allowance can be reduced, such as having an income over £260,000 or flexibly accessing your pension. So, if you are considering a particularly large contribution, you should check your available allowances carefully.

Tax relief on pension contributions means that if a basic-rate taxpayer contributes £800 to their pension, their contribution will be worth £1,000.

Higher- and additional-rate taxpayers may be able to claim a further 20% or 25%, respectively. If your pension uses relief at source, you may need to claim any additional tax relief via Self Assessment.

For example, imagine your adjusted net income is £125,000. Ordinarily, you would lose £12,500 of your £12,570 Personal Allowance and face an Income Tax bill of about £42,432.

However, if you made a £25,000 pension contribution, you would reduce your adjusted net income to £100,000 and restore your full Personal Allowance. Together with the usual tax relief on your pension contribution, this could mean you pay approximately £15,000 less in Income Tax, which is equivalent to an effective 60% rate of tax relief on the contribution.

As such, if you earn more than £100,000, you may want to explore making additional pension contributions to restore some or all of your Personal Allowance.

You also don’t need to make large pension contributions for it to be worthwhile, and even relatively modest amounts can make a big difference over time due to tax relief and compounding returns.

We can help you explore the best options for your circumstances.

Your pension income may still be taxable

Receiving tax relief on your pension contributions is not the same as making your pension tax-free.

When you start drawing from your pension, you can usually take up to 25% of it tax-free, subject to the current Lump Sum Allowance (LSA). In 2026/27, the LSA is £268,275.

Any amount above your 25% allowance is normally subject to Income Tax when you withdraw it.

So, just because your pension contributions are tax-efficient doesn’t mean your income will be when you come to draw from it.

You can read about how to ensure your retirement income remains tax-efficient in our other blog from this month.

Get in touch

To find out more about how your pension contributions can support your wider goals and help keep more of your income tax-efficient, get in touch.

Email info@mlpwealth.co.uk or call us on 020 8296 1799.

Please note

This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.