Reader’s Question: Can I avoid losing my personal allowance even though I earn £120,000?

1 min Read Published: 22 Feb 2011

 Reader's Question:

My income for the tax year will be £120,000. I have made pension contributions of £20,000. Will I still receive my tax allowance of £4,750?

 My response:

The simple answer is 'yes you will'.

 The amount of your personal allowance depends on your age and your total income during the tax year. The table below details the various personal allowances available:

Income Tax allowances 2009-10 2010-11 2011-12
Personal Allowance for those under age 65 £6,475 £6,475 £7,475
Personal Allowance for people aged 65-74 £9,490 £9,490 £9,940
Personal Allowance for people aged 75 and over £9,640 £9,640 £10,090


But to complicate things slightly – from the 2010-11 tax year the Personal Allowance reduces where an individual’s income is above £100,000 – by £1 for every £2 of income above the £100,000 limit. This reduction applies irrespective of age.

That means that someone who is, for example, under 65 and earns more than £112,950 a year will lose their personal allowance in its entirety. But as you have suggested there is a way around this.

The clever bit

The personal allowance withdrawal technically relates to something called the 'adjusted net income' and not your gross salary. For a lot of people these may be one and the same. But the 'adjusted net income' used in the calculation is an individual’s income which is subject to income tax less specified deductions, which include grossed up contributions to pensions as well as grossed up contributions to charities via gift aid.

What this means that people whose 'adjusted net income' doesn't exceed £100,000 will receive their full personal allowance. So in your case your £20,000 pension contribution brings your income down to the £100,000 limit which means that you will keep your full personal allowance.

Strangely you state that your personal allowance is £4,750 rather than the usual £6,475. I assume this is as a result of benefits in kind or something similar.

To illustrate the benefit of your chosen course of action, but working with your £4,750 figure, had you not made your pension contribution you would have received a net annual income of £74,520.

However by making the £20,000 pension contribution your net annual income becomes £65,130. But your pension pot will have been boosted by £20,000. That means that the pension contribution only cost you £9,390 net which is an effective tax relief rate of 53%.

Image: Filomena Scalise /