Pension planning for tapered annual allowance
- Gregory Deer
- 12 hours ago
- 3 min read
June 2025
Louise - US law firm associate
Current position
Louise earns £250,000 a year as a lawyer at a US law firm and her bonus takes total earnings beyond £360,000.
She contributes the minimum to her workplace pension of around £4,000 per year via salary sacrifice.
Louise also benefits from her employer’s 15% National Insurance savings being added to her pension.
Objective
Louise wanted to maximise her money
Louise's objectives are clear
Turn surplus income into wealth
Build assets for financial freedom – the option to quit her current role and be comfortable
Pay the right amount of tax at the right time
Move to her ‘forever home’ in the next 5-10 years
As a high-income professional, Louise needs careful pension planning to avoid unnecessary tax bills and wasted allowances.
Recommendations
We analysed Louise's current position and made the following recommendations based on her circumstances and objectives.
Maximise pension contributions
Louise’s pension contributions that receive tax relief are limited by the annual allowance.
Due to her earnings, the annual allowance is tapered down to £10,000 in the current tax year.
The good news is that Louise can carry forward unused annual allowance from the previous 3 tax years.
To use the current tax year’s annual allowance (£10,000), plus annual allowance that would otherwise be lost this tax year (£36,000), we advised a total pension contribution of c.£46,000.
For maximum tax efficiency, Louise made pension contributions via her employer’s pension scheme.
This allowed Louise to
Give up c.£1,750pm of take home pay
Receive c.£3,800pm into her pension.
Save over £24,000 in tax this year alone!
Allocate £1,000 surplus income to overpay mortgage debt
As an additional rate taxpayer, all interest on cash savings is taxed at 45%. Repaying the mortgage saves interest on debt and is an effective tax free return.
Overpaying Louise’s mortgage will build equity in her home for a house move within the next 5 years.
Set up regular £1,200pm contributions to a General Investment Account (GIA)
Louise is not currently using her dividend income allowance (£500 tax free dividends) or her annual capital gains exemption (£3,000 capital gains are tax free).
The regular investments are into a diversified investment portfolio and will help build flexible funds for financial freedom.
Understanding when work will be optional
Using financial projections and certain assumptions around the future, Louise is currently on track to afford to stop work at age 59.
With the changes recommended and increases to regular investments, their goal for financial freedom from age 55 looks possible.
Using annual meetings and regular check ins to adapt to changing circumstances and objectives, Louise will continue to build steadily for financial freedom while enjoying life today.
Summary
If Louise had ignored her pension for another 3 years, she would have paid c.£50,000 in avoidable tax than she needed to, and missed out on over £120,000 in pension savings.
With her pension contributions restricted in future years, the best tool available to build assets for financial freedom would have been wasted.
If saving tax and building assets to allow you to quit work is important to you, it’s time we had a conversation. Please book a call using the link below.
Risk warnings
Please note, a pension is a long-term investment not normally accessible until 55 (57 from April 2028). Lower salary may impact the amount you can borrow, such as mortgages. Past performance is not an indicator for future performance.
Investments carry risk. the value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.
Tax planning is not regulated by the Financial Conduct Authority.
