Higher rate tax relief is given by increasing the basic rate and higher rate band by the amount of gross contribution paid into a personal pension. The affect of this is that the investor will get higher rate relief by paying basic rate tax on income that they would have otherwise paid higher rate tax on.

Salary sacrifice allows an employee to give up an amount of their salary and replace it with an employer’s pension contribution creating a larger pension contribution for the employee than they would have paid themselves for the same or lower net cost. The process can also be applied to bonus sacrifice with the same effects.

From the beginning of the 2010/11 tax year individuals with ‘net adjusted income’ in excess of £100,000 had their personal allowance reduced. This reduction will be at a rate of £1 for every £2 of income over £100,000. Based on the personal allowance, this means that any person with income over £116,210 will lose their full personal allowance applying for the 2012/13 tax year.

Ordinarily it is clear whether a contribution is being made by an individual, third party or employer. However, sometimes difficulty arises in identifying whether a contribution is being made by an individual or a business, especially where pension contributions are being made out of business bank accounts.