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The Forgotten Allowance – Use it or lose it?
The Chancellor announced a few surprises in his Budget earlier this year, with some big changes in the world of pensions. One such announcement was a change to the annual allowance, which increased from £40,000 to £60,000 from April this year. This means that now is a great time to be thinking about whether you are maximising your pension contributions, as this is an often-overlooked allowance with many additional and unique benefits for those saving for retirement. Here’s how it works.
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Annual Allowances
Everyone has a number of annual tax allowances that they can use to ensure they are being as tax efficient as possible when it comes to saving and investing. Most allowances only facilitate being able to use them in the given tax year. For example, every individual over 16 has a £20,000 ISA allowance. If any of the allowance is not used by the 5th April, each tax year, then it is lost forever.
Many people think that this is the same for our annual pension funding allowance. Whilst it is partly true, it is not the whole picture.
What is the pension annual allowance?
The government has set an annual cap on the value of contributions you can make into a pension each year, that benefit from tax relief, which is called the annual allowance.
From the start of this tax year, every individual has an Annual Allowance of up to £60,000, increased from £40,000 in previous years. This is dependent on your level of UK relevant earnings (such as pay, wages, bonuses, commission and overtime) in this tax year.
You can contribute up to 100% of your relevant earnings and, provided your total contributions from all sources (including those made by your employer) do not exceed your annual allowance, you will receive income tax relief on your personal contributions.
A basic rate taxpayer will get a 20% uplift on the money they contribute to their pension, so, for every 80p they put in they will receive a 20p uplift. A higher or additional rate taxpayer could then claim the difference in the tax they have paid through their self-assessment tax return, meaning a potential tax saving of up to 45%!
Where you earn more than £60,000, have contributed the “full” amount in this tax year, and have some money set aside that you do not need access to in the short term, you may think that you can’t add any more to your pension before the new tax year. But this is not always the case as you can utilise a little know trick known as the ‘carry forward’ pension annual allowances rule.
If your employer has been contributing to your auto-enrolment pension each month from your pay, you will be utilising some, or all, of your annual allowance each year. It is important, therefore, that you are aware of the additional tax saving that could be available to you, if you were to add additional monies into pensions.
Carry Forward Allowances – who can apply?
Where you earn more than £60,000 a year and have had a pension for more than three years, you may have the ability to use carry forward allowances.
In its current format, the government rules and regulations allow an individual to go back three previous tax years to utilise any unused allowance from those three previous years.
There are a number of criteria that must be met to allow this addition to be used in current tax year 23/24:
- You must have had a pension in the tax year 2020/21
- You can only contribute up to 100% of your relevant earnings in the current tax year
- You don’t need the money in the short term. The earliest you can access your pension benefits is at age 55/56/57 (depending on when you reach that age)
- Where you are a high earner, you may be subject to tapering rules
This is the only funding allowance that permits you to use unused allowances from previous years. How long this will remain is yet to be seen but it is a very generous additional allowance should you wish to make use of it.
Whilst you have the ability to go back three years, it is now use it or lose it for any allowance you have remaining from the 2020/2021 tax year.
Don’t hang around – use it now before it’s too late
Any contributions you make will attract tax relief provided the criteria has been met. You will therefore re-coup any income tax you have previously paid on the monies. The pension company will claim the first 20% and you can reclaim the relevant higher amount (an additional 20% for a higher rate tax payer or 25% for an additional rate tax payer) through your self-assessment tax return.
If you think that you might benefit from carry forward on your pension annual allowance why not get in touch and see if we can help. We are currently offering all those with £100,000 or more in pensions, savings and investments a free review worth £500. Get in touch and see how we can help you today.
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Please note: A pension is a long term investment, the value of investments can fall as well as rise. You may not get back what you invest. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.
The information provided is for guidance only and does not constitute advice, which should be sought before making any decisions. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
