Last week I met with a couple of clients about utilising their last 3 years unused pension contributions on which they can then get 40/50% tax relief, with the new pension rules introduced recently. For some clients this can mean a potential contribution of £200,000 giving tax relief of up to £100,000.
Changes in HMRC guidance
Originally HMRC confirmed that in order for an individual to be eligible to carry forward any unused Annual Allowance they must have been both a member of and able to contribute to a Registered Pension Scheme within the previous three pension input periods (PIPs) (08/09, 09/10 and 10/11). However, HMRC has revised this guidance and the requirement to be able to contribute to a Registered Pension Scheme has now been removed. As a result, active members, pensioner members, deferred members or pension credit members of a Registered Pension Scheme within the previous three PIPs are now eligible to carry forward their unused Annual Allowance.
Points to Consider
To benefit from Carry Forward, the following points will need to be taken into consideration:
To have any unused Annual Allowance in a particular year, the individual must have been a member (whether active, deferred or pensioner) of a Registered Pension Scheme in the pension input period.
- Contributions do not have to be paid to the pension scheme under which the unused Annual Allowance arose.
- The £50,000 Annual Allowance for the current tax year must be used before carry forward can be utilised. After this any unused allowance from the earliest tax year is used first.
- The person must have Relevant UK Earnings in the current tax year to support the whole of any personal contribution.
- Tax relief on personal contributions is available at the individual’s marginal rate of tax.
- The individual’s Relevant UK Earnings in the previous tax years cannot be carried forward.
- Employer contributions can be made in excess of the individual’s Relevant UK Earnings but are still subject to HMRC’s ‘wholly and exclusively for the purpose of trade’ test for corporation tax relief purposes.
- In calculating the amount of contributions to be compared against the Annual Allowance for each tax year, you need to know the PIP for the scheme. This could be the tax year, the anniversary of the first contribution or the member’s birthday. For the St. James’s Place Retirement Plan the PIP is the tax year. The amount used in the calculation is the total amount of contributions in the PIP ending in each tax year.
- There are no special application forms or HMRC forms for exercising carry forward. The individual must report the contribution in the usual way on their self-assessment return.
The levels and basis of taxation and reliefs from taxation can change at any time. The value of any tax reliefs depends on individual cicumstances.