The payment of contributions to maximise the current tax year’s annual allowance and to make full use of carry forward is an important consideration for higher and additional rate taxpayers.
Any pension savings in excess of the annual allowance will be subject to the annual allowance charge. However, provided the individual has been a member (even if no contributions were made) of a pension scheme for the previous three tax years pension contributions can be paid in the current tax year to use up any unused allowance from the previous three tax years. This year’s annual allowance will be used first and then the oldest available of the three years.
In order to receive tax relief on personal contributions the member will need to have UK relevant earnings (basically earned income) in the tax year to support them.
Any unused annual allowance for 2015/2016 will be lost it isn’t used by the end of the 2018/2019 tax year.
Special provisions apply to 2015/2016, which was split into two parts. The annual allowance for the period from 6 April 2015 to 8 July 2015 was £80,000. For the rest of that tax year it was £0, but up to £40,000 of unused allowance could be carried forward from the earlier period to the period from 9 July 2015 to 5 April 2016 and/or to the three tax years after that.
Example – Janet
Janet is self-employed. She has threshold income of £105,000 in 2018/2019, £100,000 of which is relevant UK earnings. She can make use of the full annual allowance for 2018/2019 of £40,000. She has not yet made any pension contributions in this tax year. She wants to maximise her pension contributions in this tax year. In the last three tax years she has made a (grossed-up) contribution of £35,000 on 1 September of each year. She therefore has unused relief of £5,000 for each of 2017/2018, 2016/2017 and 2015/2016.
So, for example, if Janet makes a contribution of £55,000 in 2018/2019 this will:
- use her £40,000 annual allowance for 2018/2019;
- use £5,000 of unused relief from 2015/2016, £5,000 of unused relief from 2016/2017 and £5,000 of unused relief from 2017/2018.
Janet has also made best use of the tax relief available to her at the higher rate.
Another good reason for maximising pension contributions is the risk that the Government will at some point announce a reduction or removal of tax relief on pensions.