The time to give your finances a year-end review is fast approaching. Are you using all your tax allowances? Are you making the most of your pension contributions? Is there any way you can boost your savings?
Our Independent Financial Advisors have put together a three part mini-series about year-end planning, to help you make any important financial changes before 5 April 2018.
The second part of our series will be discussing how to make the most of your pension contributions.
The first part looks at tax allowance and the third installment is all about savings.
Don’t overlook pension contributions
The rules around how much you can pay into a pension have become more complex.
The standard annual allowance is £40,000 per person in the current tax year. The standard allowance can be reduced if you earn above a certain limit or have taken pension benefits previously. You pay contributions net of basic-rate Income Tax and your pension provider collects the tax relief from HM Revenue & Customs (HMRC).
Basic-rate tax relief is currently 20%, so if you contribute £80 per month, £100 will be invested automatically in your plan – that’s an additional £20 at no extra cost to you. If you’re a higher-rate or additional-rate taxpayer, you can claim the extra relief from HMRC on your yearly tax return or by asking your tax office to adjust your tax code. The value of any tax relief depends on your individual circumstances.
This is essentially free money, so don’t miss out.
Take your pension to the max
Carry Forward allows you to make use of any annual allowance that you may not have used during the previous three tax years, provided you were a member of a registered pension scheme. This may be particularly useful if you are self-employed and your earnings change significantly each year, or if you’re looking to make larger pension contributions.
The Annual Allowance has been £40,000.00 since the 2014/15 tax year, also known as the 'transitional year'. This was following the Chancellor’s announcement on the 8 July 2015 that pension input periods (PIP) for all pension plans would be aligned with the tax year. This meant that the PIPs for every pension plan closed on the 8 July 2015 and the next PIP ran from 9 July 2015 to 5 April 2016.
The period 6 April 2015 to 8 July 2015 is known as the pre-alignment tax year. The annual allowance that applies to PIPs ending in this period was £80,000.
The period that started on 9 July 2015 and ended on the 5 April 2016 is known as the post-alignment tax year, this was also the next PIP. The annual allowance that applied to this PIP was £0.00, however, any unused annual allowance from the pre-alignment period could be used in the post-alignment PIP. The maximum amount that could be used in this way was capped at £40,000.
You must have been in a pension arrangement in an earlier year to have unused annual allowance to carry forward, although you do not have to have contributed.
Mr James, 55, a Barrister based in London has earnings of £80,000 per annum.
Mr James hasn’t made any contributions to his personal pension since June 2015 and wants to know how much unused annual allowance he can carry forward, as he’s planning on making a large personal contribution in the 2017/ 2018 tax year.
The table below shows his pension input amounts for the pension input periods ending in the previous four tax years. For simplicity we have assumed:
- All pension input periods run in line with the tax year
- The money purchase annual allowance doesn’t apply
- There’s been no benefit accrual or contributions paid under any other registered pension schemes during the period covered
PIP ends in tax yearAnnual Allowance Pension input amount Available to
carry forward Total amount available to carry forward to 2016/17 Total amount to carry forward to 2017/18 2013/14£50,000£20,000£30,000£30,000 n/a2014/15£40,000£20,000£20,000£50,000£20,0002015/16 MTY1£80,000£100,000*nil to MTY2£30,000£20,0002015/16 MTY2nil£5,000nil£25,000£20,0002016/17£40,000£20,000£20,000 n/a£40,000
*Mr James used £20,000 of the unused annual allowance from tax year 2013/14 to cover the contribution in mini tax year 1 (MTY1), so no annual allowance charge was incurred. This reduced the cumulative carry forward amount to £30,000.
He then used another £5,000 of the unused annual allowance available for carry forward in mini tax year 2 (MTY2).
Mr James then made another contribution of £20,000 in tax year 2016/17. This means he has £40,000 unused annual allowance available for carry forward into 2017/18. When added to the £40,000 annual allowance for 2017/18, this means he’ll be able to contribute up to £80,000 gross to his pension (in line with his UK relevant earnings) without incurring an annual allowance tax charge.
By applying this planning, Mr James has also reduced his income tax bill for the current tax year.
Carry forward into the 2017/18 tax year – if Tapered Annual Allowance (TAA) applies
The example below considers if Mr James was a higher earner and subject to a Tapered Annual Allowance (TAA) of £25,000 in 2016/17 and £17,000 in 2017/18.
The table below shows his pension input amount for the last few years, and demonstrates how much he can carry forward into 2017/18 to minimise the effects of the taper:
PIP ends in Tax YearAnnual Allowance TAA Pension input amount Total amount available to carry forward 2014/15£40,000n/a£40,000nil2015/16 (MTY1)£80,000n/a£25,000£40,000 to MTY2 only2015/16 (MTY2)£40,000 carried forward from MTY1n/a£35,000£5,0002016/17£40,000£25,000£23,000£7,0002017/18£40,000£17,000Up to £24,000 n/a
Mr James can carry forward £5,000 from 2015/16 and £2,000 from 2016/17, so he can contribute up to £24,000 in 2017/18 without suffering an annual allowance tax charge.
By giving your financial situation some attention before 5 April 2018 it will ensure you have the flexibility to manage your financial affairs effectively. To find out more or to discuss your situation, please get in touch with our Independent Financial Advisors on 029 2066 0565 or email firstname.lastname@example.org. We look forward to hearing from you.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxations are subject to change.
Case Study Source: https://www.aegon.co.uk/support/faq/pension-technical/carry-forward-examples.html