What About "Annual Allowances", "Carry Forwards" and the "Tapered Annual Allowance"?
As mentioned already any personal contributions can obtain full tax relief up to 100% of their earnings or the Annual Allowance (“AA”), whichever is the lower.
AA limits have changed significantly since April 2006, from a high of £255,000 in 2010/11 to the current lower level of £40,000 in 2021/22 (pre taper – see below). The AA is specific to an individual and applies to payments or benefit accruals for any pension arrangements on that person’s behalf.
Any contributions paid over the AA are liable to a hefty tax charge pension contribution that exceeds the AA.
Whether the contributions were made personally or paid by an employer (or even as a benefit accrual in a defined benefit arrangement), the liability for settling any AA tax charge rests with the individual. The amount charged depends on the individual’s income tax rate (20%, 40% or 45%) and is not a very nice surprise if incurred!
There is often potential for individuals to carry forward any unused AA from the previous three tax years. This can amount to as much as £160,000 of allowances. We often help clients save a lot of tax using these rules, while beefing up their pension pots.
One fundamental point is that in order to carry forward AA’s you must be a member of a pension scheme for the year you wish to carry forward from.
Tapered Annual Allowance ("TAA")
Although it will not affect many but the highest earners, the TAA still needs to be monitored.
Since 6th April 2020, the TAA applies were a person has a “threshold income” over £200,000 and an “adjusted income” of over £240,000. The taper sees that person AA reduced by £1 for every £2 of adjusted income over the £240,000, but the minimum AA never falls below £4,000.
The question of “what is threshold and adjusted income?” is one we address frequently. Broadly, threshold income is a person’s net income (usually salary, bonuses, rental income dividends and pension contributions). While, adjusted income then adds in the value of any employer contributions. (the purpose of this is to stop people avoiding the lower AA by exchanging their salary for employer’s pension contributions).
You can find more details about the “Tapered Annual Allowance” on the HMRC website.
A Bit Of Advice...Don't Leave Contributions To The Last Minute!
While most people may make contributions ahead of any deadlines, we still receive so many calls saying that they want to make a contribution before their company year-end… which happens to be tomorrow! Not a good way to plan! We will always assist where we can.