As the UK tax year end approaches it is worth calculating whether you have any pension carry forward allowance. Carry forward allowance allows you to make use of any annual allowance that might have not been used in the previous three tax years. This is an effective strategy to reduce your marginal income tax rate and build retirement assets. Utilising your carry forward allowance is particularly useful if you are either a higher, additional rate taxpayer or you have surplus assets in a taxable investment account. Different rules apply if you run your own limited company.
By way of a simple example take Toby Johnson who is Zoo Director. Toby currently earns £85,000 per year. He has made contributions to his pension plan over the last few years but not his maximum allowance. Toby has a total of £105,000 carry forward pension allowance available. If Toby makes a contribution of £30,000 to his self-invested pension plan the Government will make a 20% contribution of £6,000 to Toby’s pension plan, a very good initial return on investment. Toby will also be able to claim back £6,000 on his tax return as an additional rate taxpayer. The effective tax relief on this contribution is 40% but the real cost to Toby is £24,000 (£30,000 – £6,000).
For a more detailed explanation of how the calculations are done, you can look at this example report. HMRC also has a free calculator which you can find here.
The UK Government, unhelpfully, has changed the rules concerning pension annual allowance on several occasions so use caution when doing calculations. Two conditions must be satisfied to use carry forward. First, you must have earned the amount you wish to contribute. Second, you must have been a member of UK registered pension scheme in each of the years you wish to carry forward. If you are not an active member of a pension plan it is important to open one for future contributions.
A perceived barrier to most people making use of pension carry forward is the belief that you need a lump sum of money to contribute. With planning, making a monthly contribution over the year can ease the pain.
There has been speculation in the media that the Chancellor could potentially reduce pension tax relief. It is advisable to review your personal circumstances now to determine if there could be any potential savings. Should you have any questions please do not hesitate to contact me.
The information provided in this article is for general informational purposes only and should not be considered as financial advice. While every effort has been made to ensure the accuracy of the information, it is not intended to address the specific circumstances of any individual or entity. Financial decisions should always be made based on your unique situation, objectives, and risk tolerance.
We strongly recommend consulting with a qualified financial advisor or professional before making any financial decisions or investments. The content of this article does not constitute an offer, solicitation, or endorsement of any particular financial product or service. The author and the publisher cannot be held responsible for any losses or damages arising from the use or reliance on this information.