Carry forward in 2017/18

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For adviser use only

 

Every year HM Revenue & Customs (HMRC) reviews the cost of the various tax reliefs it offers throughout the UK. Apparently there are over 1000 different forms of tax relief available, many historic and largely unused but still ‘live’. One that’s very much alive and kicking is tax relief for contributions to registered pension schemes and it was singled out for special attention in HMRC’s November 2016 consultation paper on reducing the Money Purchase Annual Allowance (MPAA) when it was claimed the cost of income tax and national insurance contribution relief on pension contributions in 2014/15 totalled £48 billion.  

Around the same time the House of Commons Library published a report that looked at the Government’s previous attempts to reduce the cost of pension tax relief since the heady days of 2010/11 when the annual allowance (AA) peaked at £255,000 (and indeed unlimited contributions were possible in the year that benefits were taken) to the now much lower AA, tapered AA and MPAA that apply today.

Speculation on the future of pension tax relief is not new, it’s been talked about for many years. As a result of this year’s Election we’re likely to see an Emergency Budget in the summer as well as the already planned Budget in the autumn, and this will increase the opportunities the Chancellor has to review pension tax relief. We hope that the Government resists the temptation to make further changes so that clients can plan for their financial futures with confidence and certainty.

Meantime, whilst there’s some uncertainty on what may happen in the future, there’s certainty today that pension contributions paid now will attract the levels of tax relief currently available.

An AA of £40,000 a year gives most clients sufficient scope to make the level of pension savings they want. For those who exhaust their AA and are keen to pay more the carry forward provisions allow any unused AA from the previous three years to be brought forward to the current year.

The ability to carry forward unused AA offers a very valuable way of maximising pension contributions for those who have not made the most of their allowances over the last few years. It has also helped those subject to the tapered AA transition to the new rules and give them time to possibly renegotiate remuneration packages with their employers.

Carry forward is not without complexity, however. When working out the unused AA that can be brought forward to 2017/18 it is necessary to be familiar with all of the following technicalities:

  • The MPAA provisions that determine if it’s possible to carry forward money purchase contributions.
  • The pension input period provisions that applied in 2014/15.
  • The special rules applying to the transitional year 2015/16.
  • The tapered AA rules that apply to 2016/17 and beyond.

Many clients (and indeed most of the pension industry) were glad to see the back of innumerable pension input periods running under different pension arrangements when HMRC decided on 8 July 2015 to standardise arrangements to run in line with tax years. However, the special rules applying to the transitional year 2015/16 with its mini tax years 1 and 2 mean there is an additional step in the calculation process to determine how much-unused AA is available.

The tapered AA provisions apply for 2017/18 (to determine the AA) and also for 2016/17 (to determine the unused AA in that year for carry forward purposes) where both a client’s ‘adjusted income’ exceeds £150,000 in the respective tax year and their ‘threshold income’ in that same year exceeds £110,000. Take a look at this FAQ for more information on the tapered AA.

Let’s look at an example.

Colin has been paying regular contributions to his personal pension (PP) since 2014/15 at the rate of £20,000 per annum. He is a company director, is nearing age 50 and enjoys a high level of income. He’s keen to maximise his contributions and boost the level of his pension savings as retirement starts to appear on the horizon. For tax year 2017/18 his adviser helps him work out that his total ‘adjusted income’ will be £196,000 (and his ‘threshold income’ will be well over £110,000), so he’s subject to a tapered AA of £17,000.

He wants to pay more and has sufficient ‘relevant UK earnings’ to make a substantial, tax relievable personal contribution. Again with the help of his adviser it’s worked out that he has unused allowance available in the previous years to bring forward that will allow him to pay a personal contribution of £61,600 net (£77,000 gross) in 2017/18 and claim higher/additional rate tax. (As an alternative, part or all of the contribution could be paid by his company with corporation tax relief available if it’s deemed to be wholly and exclusively for the purpose of the business.)

The total contribution possible is calculated as follows (and per the diagram):

  • For 2014/15, the pension input period for his plan ran in line with tax years and £20,000 was paid during the period, meaning £20,000 unused AA is available.
  • For 2015/16, contributions of £15,000 were paid up to 8 July 2015 (mini tax year 1), allowing a full £40,000 to be carried forward to mini tax year 2. Contributions of £5,000 were paid between 9 July 2015 and 5 April 2016 (mini tax year 2) meaning £35,000 unused AA is available.
  • For 2016/17, his total ‘adjusted income’ was £180,000 (with ‘threshold income’ again over £110,000) and so his tapered AA was £25,000. Contributions of £20,000 were paid in the tax year and so £5000 unused AA is available.
Pension input period ends in tax yearAnnual allowanceTapered annual allowancePension input amountAmount available for carry forward
2014/15 £40,000 N/A £20,000 £20,000
2015/16 mini tax year 1 (MTY1) £80,000 N/A £15,000 (£40,000 to MTY2 only)
2015/16 mini tax year 2 (MTY2) Up to £40,000 from MTY1 N/A £5,000 £35,000
2016/17 £40,000 £25,000 £20,000 £5000
2017/18 £40,000 £17,000 Up to £77,000 (gross)  
With the future of pension tax relief far from certain many clients may wish to consider maximising their pension contributions now to take advantage of the generous levels of tax relief that are currently available. Whilst advising on carry forward in tax year 2017/18 requires knowledge of the complex transitional rules and mini tax years that applied for 2015/16 as well as the tapered AA provisions for 2016/17 for those affected, advisers can add real value to the client relationship by being able to demonstrate in monetary terms the actual tax savings that clients can make now, pre-empting any future changes HMRC makes to pension tax relief.

The value of any tax relief depends on your individual circumstances / the individual circumstances of the investor. This information is based on our understanding of current, taxation law and HMRC practice, which may change.

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