Tag Archives: Tax Relief

Claire Trott, Financial Planning Week tip: Maximising pensions tax reliefs using carry forward

With the deadline for the Mandatory Pension Savings Statements being this month (6 October) it is now that you can calculate what your clients’ available annual allowance is because the information should now be to hand.

The basics

Carry forward allows clients to utilise unused annual allowances from the previous three tax years. You must first use the current tax year fully and then use the oldest tax year next and so on. The important thing to be sure of is that the client has enough, not necessarily to get too hung up on which year it is used from at this point in time. Exceeding the annual allowance including carry forward will mean tax charges, designed to recoup tax relief given. The tax charge is payable by the member, even if contributions have been paid entirely by the employer.

If total contributions do not exceed the annual allowance including carry forward then there is no need to declare this on a tax return, only contributions in excess of this need to be declared in the pension tax charge section of self assessment. However, for those contributing to a relief at source pension scheme, who are higher or additional rate tax payers they will need to ensure they claim any extra tax relief due. This should be done even if they exceed the annual allowance so as not to be unfairly penalised.

Eligibility

We have to remember that not everyone is eligible for carry forward, they must have been a member of a scheme in the years in which they are carrying forward unused annual allowance.

This doesn’t just mean a contributing member, but also anyone with a deferred pension scheme, such as an old final salary pension or even a contracted out rebate scheme for instance.

But if this is their first pension contribution ever, then carry forward isn’t available. In additional, if the client is subject to the money purchase annual allowance then carry forward is only available in relation to defined benefit accrual.

Limitations

The annual allowance is a test on total pension contributions including personal tax relief received by the scheme and employer contributions, and therefore when carrying forward the annual allowance from the previous three years it increases the total amount of pension contributions that can be paid within the current tax year. What it doesn’t do is bring forward unused tax relief, so for personal contributions there is a limit on the amount of tax relief available equal to £3,600 or 100% of relevant UK earnings within the current tax year. This means that for many they will have significantly more available annual allowance than they can pay with personal contributions alone.

It is important to remember in addition that carry forward isn’t limited by the clients earnings in previous years, so if they had earnings of £20,000 and paid a £10,000 gross personal contributions with no employer contributions then £30,000 carry forward would be available.

Tapered annual allowance

Pension savings statements or contribution histories provided by schemes will not take into account the tapered annual allowance. Schemes are not responsible for this calculation because they do not have sufficient information to do the calculations. Therefore, it is important to fully understand the client’s income, including in previous years. If the tapered annual allowance applied in previous years, it is this figure that will be used in the carry forward calculations, not the standard annual allowance

Comments

There are many moving parts when dealing with tax relief on pension contributions which are important to understand. My colleague Chris Jones provided some tips earlier in the week on “Making the most of pensions tax relief ahead of another Budget” which covers many of these complex aspects and so worth a read.

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How pension contributions are tested against the annual allowance and how personal tax relief needs to be considered separately

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The Future of Pensions Tax Relief

Change seems inevitable, the direction of travel seems clear – what can we expect when we get more detail at the next Budget?

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