December 9th, 2019

The Jonathan Ford & Co Advent Calendar – Day 9


Over the course of the festive season we’ll be bringing you an advent calendar’s worth of tax and financial tips.  Some of them might even be a little Christmassy!  Ever fancied becoming an alchemist?  On day 9 of advent we tell you how you can when…

Earning over £100,000

Once you start to earn over £100,000 the government begins to claw back your tax free personal allowance.  You give back £1 of personal allowance for every £2 you earn above £100,000.  In both the 2019/20 and 2020/21 tax years, your personal allowance is therefore completely lost once your earnings reach £125,000.

So if you earn £100,000 and you expect income to rise to £110,000, how much of that £10,000 rise hits your back pocket?  The answer is much lower than you think: just £3,800.

A way of mitigating this 62% tax rate is to make an £8,000 pension contribution (or charitable donation).  This has the effect of reducing your income back below £100,000 and restores your full personal allowance.

Why is this better I hear you ask?  After all, you’ve gone from receiving £3,800 of net income to having to pay out £8,000.

Let’s analyse the effect of the pension contribution: you’ll save £2,000 of tax by retaining your full personal allowance plus you’ll get a £2,000 tax refund due to higher rate tax relief.  So the cost of the contribution is ultimately £4,000 – not £8,000.

Now here’s the kicker: following your pension contribution, the government contributes a further £2,000 so you will have £10,000 sitting in your pension pot.  OK you can’t access that £10,000 (plus growth) until you retire but, in effect, tax alchemy has allowed you to turn £3,800 of lumpen lead into five gold rings worth £10,000.

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Pensions Tax Advice


John manages a wide portfolio of owner managed businesses and oversees the smooth operation of the firm’s payroll department.

After obtaining his degree in mathematics from the University of Liverpool, John joined Jonathan Ford & Co in 2004 and qualified as a chartered accountant four years later. John likes to keep abreast of developments in tax and accounting and is responsible for the mentoring of junior staff.

Outside of work, John enjoys powerlifting and is a Liverpool FC season ticket holder.

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