Revised guidance from HMRC this week shows that it will be their practice to consider each year of Carry Forward individually, which could lead to greater allowable contributions than previously thought.
In April 2011 the annual allowance for pension contributions was changed to £50,000, a reduction for those who had been able to contribute £255,000 in the prior year, but an increase for those caught by “anti-forestalling” rules.
Whilst contributions were limited to earnings in the current year, carry forward of unused relief was introduced, allowing individuals to go back up to three years (subject to full use of the current year) to gain the benefit of as much as 50% tax relief.
Her Majesty’s Revenue & Customs have now published guidance on their practice, which was more generous than generally interpreted. The example on HMRC’s site is useful to understand this point:
Bill’s pension savings in 2012/13 are £62,000. This is £12,000 more than the annual allowance of £50,000. Bill will have an annual allowance charge on £12,000 if he doesn’t have any available annual allowance to carry forward from earlier years. To work out whether he has any available annual allowance, Bill will need to work out what his pension savings were in the previous three tax years. As the first two of these years are from before 6 April 2011, Bill will need to re-calculate his pension savings for those years using the post 5 April 2011 valuation rules if from a defined benefit or cash balance arrangement. His pension savings for the previous three years are:
- 2011-12 – £48,000
- 2010-11 – £55,000
- 2009-10 – £25,000
Bill can only carry forward unused annual allowance if it has not already been used up by pension saving that is more than the annual allowance in a later tax year. As Bill’s pension saving for 2010-11 is more than £50,000 this will reduce the amount of annual allowance he can carry forward. The £5,000 pension saving that is more than the 2010-11 annual allowance will use up Bill’s available annual allowance from earlier years as follows.
2009-10 – £5,000
Bill has £22,000 available annual allowance to carry forward to 2012-13. (£20,000 from 2009-10 plus £2,000 from 2011-12.) So, in 2012-13 Bill can have pension savings of £72,000 before he has to pay an annual allowance charge. Bill’s actual pension savings of £62,000 are less than this so he has no annual allowance charge for 2012-13.
He also has annual allowance available to carry forward to 2013-14. The amount of available annual allowance that he can carry forward is £2,000. This is because his remaining unused annual allowance from 2009/10 (£8,000) will be from four years ago and so will be out of time and not available.
In 2013-14 Bill’s pension savings are £55,000. This is £5,000 more than the annual allowance of £50,000. Bill has £2,000 available annual allowance to carry forward from the previous three years so he will have an annual allowance charge on £3,000.
Pensions tax relief is a complex area, but in some cases the current rules can allow as much as £250,000 to be granted relief in any one year, still making pensions a useful tax-planning tool. Advice should be sought from an appropriately qualified individual, and as FT Adviser Individual Pensions Adviser of the Year 2011 we are well placed to assist.