Maximising pension tax relief if you earn between £100k and £125k

In this article, we’ll break down what the personal allowance taper means, why it affects your tax bill so heavily in this income band, and how making pension contributions can help you reduce your taxable income. Whether you’re new to pensions or looking to optimise your existing retirement strategy, this guide will provide you with the essential knowledge to take control of your finances and save more for the future.

What is the personal allowance, and how does it work?

The personal allowance is the amount of income you can earn each tax year without paying income tax. For the 2025/26 tax year, the personal allowance is set at £12,570. This means if you earn less than this amount, you generally won’t pay any income tax.

However, this allowance doesn’t remain the same for everyone. If your income exceeds £100,000, the personal allowance starts to reduce, or ‘taper’, at a rate of £1 for every £2 earned above £100,000. This tapering means the allowance is gradually withdrawn, and by the time you earn £125,140, it’s reduced to zero. In other words, once you cross that £125,140 threshold, you no longer benefit from a personal allowance.

Why does this matter between £100,000 and £125,140?

The tapering of the personal allowance creates a unique tax situation for those earning between £100,000 and £125,140. Because you lose £1 of tax-free allowance for every £2 of extra income, this effectively increases your marginal tax rate on income in this band.

Normally, income between the basic rate threshold (£12,571 to £50,270) is taxed at 20%, and income above this up to £150,000 is taxed at the higher rate of 40%. But for incomes between £100,000 and £125,140, the loss of personal allowance effectively adds an additional tax on every extra pound earned. When combined with the 40% income tax, this creates an effective marginal tax rate of 60%.

Put simply: for every extra £1 you earn in this range, you could lose 60p in tax.

How do pension contributions relate to this?

Here’s where pension contributions come into play. When you pay money into a pension, it counts as a relief-eligible contribution. This means that your pension contributions reduce your ‘adjusted net income’, the figure the government uses to calculate your personal allowance taper.

For example, suppose you earn £110,000 and make a £10,000 pension contribution. Your adjusted net income becomes £100,000 (£110,000 minus £10,000), which means you retain your full personal allowance of £12,570.

By reducing your adjusted net income below the £100,000 threshold, you avoid the taper on your personal allowance entirely. As a result, your taxable income is lower, and you pay less income tax.

What does this mean for effective tax relief?

Because of the personal allowance taper, pension contributions in this income band attract an effective tax relief rate of approximately 60%, which is significantly higher than the usual basic rate (20%) or higher rate (40%) tax relief.

Here’s how it works:

• • You automatically receive basic rate relief of 20% on your pension contributions. For example, if you contribute £8,000, the government adds £2,000, making the total contribution £10,000.

• • If you are a higher-rate taxpayer (40%), you can claim the additional 20% relief via your Self-Assessment tax return.

• • In this income band, because your personal allowance is being withdrawn, the effective tax relief is increased by an additional 20%, due to the tax saved by preserving the personal allowance. This adds up to a total of around 60%.

Breaking it down with an example

Let’s consider Jane, who earns £110,000 annually. Without pension contributions, her personal allowance is reduced by £5,000 (because £110,000 is £10,000 above the £100,000 threshold, and the allowance reduces by £1 for every £2 over).

This means Jane’s personal allowance is £7,570 instead of £12,570, increasing her taxable income by £5,000. She would pay 40% tax on that extra £5,000, equalling £2,000 in tax.

Now, if Jane contributes £5,000 to her pension, her adjusted net income falls to £105,000. This reduces the personal allowance withdrawal to £2,500, effectively increasing her tax-free income by £2,500 and reducing her taxable income.

The tax saved from this allowance preservation, combined with the basic and higher-rate tax relief on her pension contribution, can push Jane’s effective tax relief close to 60%. This makes pension contributions in this income band incredibly tax efficient.

Why this matters

Understanding this tax relief quirk is crucial if you fall within this income bracket because you can:

1. 1. Significantly reduce your tax bill—pension contributions reduce your taxable income and can help you retain more of your personal allowance, lowering your overall tax liability.

1. 1. Boost your retirement savings—the enhanced tax relief means more money effectively goes into your pension, helping grow your retirement fund faster.

1. 1. Plan more effectively—knowing how your contributions impact your tax position allows you to plan your pension savings and other finances more efficiently.

Important considerations and next steps

While this tax relief is generous, it’s essential to keep in mind:

• • Annual allowance limits—the UK government limits the amount you can contribute to your pension each year with tax relief. For most people, this is £60,000 per year (2025/26), but it can be lower if you have a high income or have already started drawing from your pension.

• • Lifetime allowance—although the lifetime allowance tax charge has been effectively removed from April 2023, it’s worth staying informed about ongoing changes to pension rules.

• • Claiming higher-rate relief—if your pension provider only gives basic rate relief, you’ll need to claim the additional higher-rate relief via your Self-Assessment tax return.

• • Complex personal circumstances—other factors, such as additional sources of income, benefits in kind, or salary sacrifice arrangements, can impact your adjusted net income and personal allowance taper.

How we can help

Tax and pension rules can feel complex, especially when you’re navigating income thresholds and tapered allowances. At Beaumont Wealth, we specialise in helping clients maximise their pension tax relief and build effective retirement plans tailored to their circumstances.

We can:

• • Review your current income and pension contributions

• • Model how different contribution levels affect your tax relief and take-home pay

• • Help you understand how to claim all the tax relief you’re entitled to

• • Guide you through the pension rules, allowances, and potential pitfalls

• • Create a personalised retirement savings strategy that works for you

Final thoughts

If you earn between £100,000 and £125,000, pension contributions offer a powerful opportunity to reduce your tax bill and grow your retirement savings. Thanks to the personal allowance taper, you could benefit from an effective tax relief rate of around 60%, making it one of the most tax-efficient ways to save.

If you’re unsure how this applies to you or want expert advice on maximising your pension and tax relief, get in touch. Our friendly, professional team will help you understand your options and make confident decisions for your financial future.