In 2014 the then chancellor, George Osbourne announced changes to pensions, which meant that from April 2015 “no one will ever have to buy an annuity again”. These “Pension Freedoms” have allowed individuals from age 55 much greater access to their pension pots than they have enjoyed previously and as a consequence have rekindled the interest in pensions for many investors.
The Annual Allowance restricts the amount that can be invested into a pension for each tax year. This allowance decreased from £50,000 to £40,000 in the 2013/14 tax year, where it has remained since.
However, individuals can also carry forward any unused allowance from the previous three tax years, as long as they held a suitable pension in place for those tax years in question.
This means that it is possible to carry forward the £50,000 allowance from 2013/14 up to the end of the current tax year on 5th April 2017, after which this allowance will be lost forever.
As always, there are many other rules to consider and advice should be sought:
- The full allowance for the current tax year must be fully used before carrying forward unused relief.
- If the contribution is made personally from net income then tax relief is only available where the level of income exceeds the total pension contribution including the amount carried forward, which may limit its appeal for some, including the self employed.
- For employers using carry forward for their employees this restriction does not apply, with the whole contribution potentially being permitted and reducing the corporation tax bill for the tax year in which it is paid.
- The Tapered Annual Allowance could apply for high earners from the current 2016/17 tax year, which may restrict pension contributions relating to the current tax year for high earners.
The “Tapered Annual Allowance” potentially reduces the 2016/17 pension allowance for individuals with total taxable income (less personal pension contributions) in excess of £110,000. Should their adjusted income, which includes the addition of both employee and employer pension contributions exceed £150,000, then the allowance is reduced on a tapered basis down to a minimum of £10,000.
The rules on this allowance are complicated and there are further considerations relating to matters such as salary sacrifice arrangements, so advice should be sought.
However the upshot can be that for high earners the simple act of making a pension contribution can reduce the pension annual allowance, potentially resulting in a tax charge.
With careful planning, for many it may be possible to carry forward the £50,000 annual allowance from 2013/14 before it is gone, but time is running out.
The Next Step
If you would like further information on the above post or to discuss your own specific circumstances please give Shane Bingley a call on 01462 687337 or email firstname.lastname@example.org.
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