Tax information for high earners
This page provides important information for high earners.
What is the Lump Sum Allowance (LSA)?
When you access your pension, you can usually take up to 25% of it as a tax-free lump sum.
Your ‘Lump Sum Allowance’ is the maximum amount of money you can take as tax-free lump sums from all the pensions you have. While you can still take out money over this allowance, you will need to pay income tax on it. The Lump Sum Allowance is £268,275. It will be higher if you have any protected tax-free lump sums, or a protected lifetime allowance
How much can I pay into my pension plan and still receive tax relief?
You can normally pay the equivalent of your annual salary into your company pension plan each year and still get tax relief. However, there is an Annual Allowance and if you go beyond this, you will incur a tax penalty. The Annual Allowance is currently £60,000.
This allowance applies across all schemes you belong to, and includes all contributions paid by you or anyone else on your behalf – including your employer.
You’ll have a reduced (‘tapered’) annual allowance if both of the following apply:
- your ‘threshold income’ is over £200,000 (your income excluding any pension contributions – unless they’re paid as a salary sacrifice by your employer)
- your ‘adjusted income’ is over £260,000 (your income added to any pension contributions you or your employer make).
If these apply to you, your annual allowance will drop by £1 for every £2 your adjusted income goes over £260,000. This is limited however – the minimum tapered annual allowance you can have is £10,000. So, if your income is over £360,000, including pension contributions, your annual allowance will be £10,000.
If you have pension benefits in a defined benefit or final salary scheme, they may also count towards your allowance. You should ask your scheme administrator if you think this might apply to you.
I’ve started to take some of my pension benefits, can I still pay into a pension?
If you have started to take your pension benefits, the amount you can pay into your pension may be limited to £10,000 a year irrespective of how much you earn. This is called the money purchase annual allowance. You would also lose the right to carry forward any unused allowance.
You can use H M Revenue & Customs (HMRC) annual allowance calculator to check if you have to pay tax on your pension savings, or if you have any unused annual allowances that you can carry forward. For more information on annual allowances please visit Gov.uk.
How will my pension be taxed
You can normally take up to 25% of your funds as tax-free cash. The rest will be taxed at your marginal rate of income tax.
Calculating the value of your pension pot
To find out if you’re likely to exceed the lump sum allowance, you need to add up the value of all your private and workplace pensions excluding any State Pension entitlement and divide by 4:
For personal pensions, SIPPs and money purchase or defined contribution schemes, you simply use the value of your pot.
If you have a final salary or defined benefit pension scheme, you need to use 20 times the annual pension payable plus any additional tax-free cash you’re entitled to.
If you’re already taking a pension from other schemes via an annuity, drawdown or occasional lump sum withdrawals, these need to be taken into account too.
If you have any questions about these allowances and what it means for you, you can call our specialist helpline on 0345 070 2983. Call charges will vary. We may record and monitor calls.
This information is based on the rates and allowances applicable in the 2024/2025 tax year. Different rates and allowances will apply to different tax years.
Please read Tax Year Rates and Alowances 2024/2025 to find out more about allowances which apply to saving for retirement