HMRC have updated their guidance on the rules for carrying forward the unused pension savings annual allowance, together with a calculator on their website.
For most taxpayers the maximum amount of pension savings that qualifies for tax relief each tax year is £40,000. It is possible to increase this amount by utilising unused relief brought forward from the previous 3 tax years, provided the individual was a member of a pension scheme that year.
The brought forward relief from the earliest year is utilised before later years. Thus for the current tax year 2018/19 the unused relief from 2015/16 may be utilised in addition to the current year relief, followed by 2016/17 and then 2017/18.
2015/16 PENSION ANNUAL ALLOWANCE LAPSES ON 5 APRIL 2019
To utilise the 2015/16 unused relief any additional pension savings would need to be paid to the pension fund by 5 April 2019, otherwise the relief from 2015/16 will lapse.
Note however that for some taxpayers the method of calculating unused relief for 2015/16 is extremely complicated as the government changed the pension rules part way through the year on 8 July 2015. The amount of pension allowance will depend on the pension input period of your scheme and we can assist you in calculating the 2015/16 relief if you have not already had full relief already.
TAPERED PENSION TAX RELIEF FOR THOSE WITH HIGH INCOME
For most taxpayers the maximum pension input annual allowance is currently £40,000.
However, from 2016/17 those taxpayers with ‘adjusted income’ over £150,000 and ‘threshold income’ over £110,000 receive a tapered annual allowance. For those persons affected the allowance tapers by £1 for every £2 that their adjusted income exceeds £150,000 down to a minimum annual allowance of £10,000.
The calculations of ‘adjusted income’ and ‘threshold income’ are complicated and we can assist if you believe that this restriction applies. There are ways in which these figures can be reduced so as to minimize the effect of the restriction.
AND YOU MAY HAVE TO PAY TAX IF YOUR PENSION SAVINGS ARE TOO HIGH!
If your pension savings are more than your annual allowance for the tax year, and you do not have unused annual allowances from the 3 previous tax years to cover the difference, you’ll have to pay tax on the excess.
You’ll get a statement from your pension provider telling you if you go above the annual allowance. If you’re in more than one pension scheme, ask each pension provider for statements. This will help you work out how much you’ve gone above the allowance.
There is a calculator on the HMRC website but we can of course help you check that you have not exceeded the limits.
As you can see from the above, despite the “simplification” of pensions by George Osborne in 2015, the system is still extremely complicated and we are expecting yet further reforms in future Budgets. Nevertheless, saving in a pension is still very tax-efficient as for a higher rate taxpayer the net cost of saving £10,000 in a pension is currently £6,000.