DOES IT PAY TO BREACH THE ANNUAL ALLOWANCE?

LET us take a 50-year-old saver with a salary of £215,000 – an additional rate taxpayer – who hopes to retire in 10 years’ time.

If their employer pays 6 per cent into their pension fund and they also pay in the same amount, the total pension contribution is £25,800 – £12,900 each.

But because their taxable income is over £210,000, the maximum contribution permitted under the annual allowance rules without a tax charge is £10,000.

Given the allowance is breached by £15,800, this results in a tax charge of £7,110 (45 per cent of £15,800). Assuming the charge is paid from the pension this leaves £18,690 invested.

With an assumed annual pension fund growth rate of 4 per cent, this sum would grow to £27,665 in 10 years’ time. Staying in the scheme and paying the tax charge is therefore a no-brainer.

A personal contribution of just £7,095 – £12,900 minus tax relief of 45 per cent – ends up being worth £27,665, £18,328 after tax-free cash and income tax of 45 per cent.