How to Use Pension Contributions to Get Back into the Basic Rate Band

In the current tax year, most people in England, Wales and Northern Ireland can earn up to £12,570 before paying Income Tax.

After that, income up to £50,270 is taxed at the basic rate of 20%. Income above £50,270 is taxed at 40% until you reach the additional-rate threshold at £125,140, after which income is taxed at 45%.

Seeing your tax increase from 20% to 40% of earnings can take some of the thrill out of a pay increase, bonus or windfall.

But don’t despair, because pension contributions can change those figures.

When you make a pension contribution, you will usually receive tax relief on it.

For someone making personal pension contributions, the pension provider will normally add basic-rate tax relief to the contribution. HMRC also takes pension contributions into account when calculating what’s known as your “adjusted net income”.

This means that if your income is just above the higher-rate threshold, increasing your pension contributions could bring some or all of that income back into the basic-rate band.

For example
Imagine you earn £50,000 a year and pay a 5% employee contribution into your workplace pension.

You then receive a pay rise that takes your salary to £55,000.

For the 2026/27 tax year, the higher-rate threshold is £50,270. So, with an income of £55,000, £4,730 of your income now sits above the Basic-rate threshold.

You decide to increase your pension contributions so that you can keep more of your income and lose less to tax.

If we assume your existing 5% pension contribution is based on your full £55,000 salary, you are already contributing £2,750 per year.

To bring your adjusted net income down to £50,270, you would need to up those total gross pension contributions to £4,730 per year.

That’s an additional gross contribution of £1,980 per year. It’s not money in your pocket – but it is money that you get to keep for your future retirement.

And it means the whole of your income would now fall within the basic-rate band rather than having £4,730 exposed to the 40% higher rate.

A pension contribution isn’t simply about reducing your tax bill today.

You’re also putting more money towards your retirement.
For a higher-rate taxpayer, pension contributions can therefore provide a useful combination: you reduce the amount of income exposed to higher-rate tax while increasing your retirement savings.

If you pay tax through PAYE, the way you receive the additional tax relief can depend on how your pension contributions are made. If your pension uses relief at source, you may need to claim additional higher-rate relief yourself.

One thing to be aware of…

You cannot, unfortunately, put an unlimited amount into your pension to reduce your tax bill this way.

For 2026/27, the standard pension annual allowance is £60,000, although there are circumstances where your allowance can be lower. Tax relief on personal contributions is also generally limited to 100% of your UK taxable earnings, subject to the relevant rules.

If you’re making a large contribution, particularly if you have a high income or have already paid significant amounts into pensions during the tax year, it’s worth checking your position carefully or getting independent financial advice.

You don’t need to be an expert in tax to make the most of pension tax relief!

If you’re earning just above the higher-rate threshold, it’s worth checking whether increasing your pension contributions could bring some of your income back into the basic-rate band.

And you’re not simply paying money away to save tax. You’re putting that money towards your future.

The key is to make sure any pension contribution fits within your wider financial plans and that you understand the rules before making a large payment.

And if you need some professional advice, our Independent Financial Advisor can help.