The clock is ticking on using up your pension annual allowance.
The allowance effectively sets the maximum pension contributions from all sources (including your employer) which can be made tax-efficiently. In recent times it has been the subject of much controversy because of the way the allowance is tapered from the ‘standard’ £40,000 to as little as £10,000 for higher earners.
One reason why the taper rules have come to the fore is another aspect of the annual allowance which has received far less press coverage: the carry forward rules. These allow you to mop up unused annual allowance from up to three tax years ago – i.e. from 2016/17 onwards during the 2019/20 tax year. In theory this could mean that, before 6 April 2020, tax-efficient pension contributions of up to £160,000 could be made (£40,000 a year for 2016/17 – 2019/20 inclusive). Although bear in mind that your own contributions are only tax-relievable up to the level of your earnings (or £3,600 if more).
As you might expect, there is some complex legislation setting out how carry forward operates. For example:
- You must have been a member of a registered pension scheme in the tax year from which any unused annual allowance is carried forward. However, you (or your employer) do not have to have paid any contributions or accrued any benefit during those years, nor do any carried forward contributions have to be made to that scheme.
- You must have covered an effective ‘entry fee’ of contributions equalling your annual allowance for the current year, i.e. £40,000, if you are not caught by the taper regime.
- The carry back goes to the oldest tax year first and then works forward.
- All tax relief is given in the current tax year, not the year to which the unused allowance relates.
- Carry forward is not available in respect of money purchase pension funding if, at any time, you have taken advantage of the 2015 pension flexibilities to draw taxable income flexibly from any money purchase pension arrangement.
Calculating how much can be carried forward is sometimes a difficult exercise, requiring detailed contribution records, so if you want to beat the deadline for using up your remaining allowance from 2016/17, start seeking advice now.
The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Content correct at time of writing and is intended for general information only and should not be construed as advice.