Is this the last call to maximise tax relief on pension contributions?

As the end of tax year approaches the window of opportunity to maximise contributions to pensions and take advantage of valuable tax relief could be closing.

Patrick Goddard discusses the possible changes to Pension contributions.

There is much speculation that the upcoming Budget will make further significant changes to the already 'much tinkered with' pensions regulations.
Pensions currently enjoy unrivaled tax benefits but the amount that can be invested has reduced steadily each year since 2010/11, particularly for higher earners.


What is Carry Forward?

The Annual Allowance limits the gross contributions each tax year that qualify for tax relief. Carry forward is a facility whereby individuals who have used the current year annual allowance can utilise unused allowance from the previous three tax years hence claiming further tax relief. This is particularly useful for high earners who can claim up to 45% relief on their contributions. The following table shows how it works:

The Government automatically pays 20% of contributions in basic rate tax relief (i.e. only £80,000 needs to be paid for a £100,000 gross contribution). Higher rate tax payers can claim back a further 20% relief (25% for additional rate payers).

Here's an example :-

Ben runs a small building company and has made regular contributions into his personal pension of £1000pm (£12000pa) for each of the last three tax years and has averaged around £60,000pa net profit. He recently completed a big contract and received payment of £140,000 boosting his profits for this year to £110,000. He continues to make his regular £12,000pa contribution leaving him with a further £28,000 of unused allowance for the current year. However, he has unused allowance from the previous three years totalling £104,000. He decides to make a one off contribution this year of £72,000 which costs Ben a net amount of £43,200, tax relief pays for the other £28,800.

There are a couple of conditions to qualify for Carry Forward:

- You must have been a member of a pension scheme in each of the years you are carrying forward from, although you don't need to have made any contributions.

- You must have earnings of at least the amount you are contributing in the tax year the contribution is made.

As with many aspects of current Pension regulations the rules can be quite complex and it is important to take professional advice. However, for those in a position to benefit from the current rules there is still significant advantage to be gained but be warned - recent changes have shown the Government is prepared to take big decisions regarding pension rules and there is no guarantee that tax relief on pension contributions will remain in place indefinitely.

If you feel you would like to know more about this or have any other questions regarding pensions please get in touch and we will be able to discuss your personal circumstances.