The end of the tax year is an important time for planning and managing your finances, especially when it comes to your pension. It is an opportunity to ensure that you have made the most of your annual pension contribution allowance, also known as the ‘annual allowance’.What is the annual allowance?
The annual allowance is the maximum amount of pension savings you can contribute into a pension in each tax year that can benefit from tax relief. The annual allowance for the 2019/20 tax year is capped at £40,000. Tax relief on pension contributions made by an individual into a qualifying pension scheme are limited to the higher of 100% of relevant UK earnings, or £3,600 p.a. For example, an individual with net relevant UK earnings of £25,000 could contribute £40,000; however, the tax relief is restricted to the net relevant earnings.
There is a lower limit of £4,000 that could apply if you have accessed your pension benefits flexibly through a money purchase style pension plan (known as the Money Purchase Annual Allowance). The annual allowance applies across all UK registered pension schemes that you belong to, and includes all of the contributions that you, your employer, or any other third party have contributed during the tax year.What happens if you exceed your annual allowance?
Essentially, you will not receive tax relief on any contributions you pay that exceed the annual allowance, and you may also be faced with an annual allowance tax charge. The annual allowance tax charge will be added to the rest of your taxable income for the tax year in question when determining your tax liability. Alternatively, if the annual allowance charge is more than £2,000, you could ask your pension scheme to pay the tax charge from your benefits. This would mean your pension benefits would be reduced.
Please note that your annual allowance could also be reduced if your total income is above £150,000. This is referred to as ‘Tapered Annual Allowance’.Can I carry forward unused annual allowance?
Yes. The carry forward option allows you to make use of any annual allowance that you may not have used during the three previous tax years, if you were a member of a registered pension scheme during that time.
To use carry forward, you must make the maximum allowable contribution during the current tax year and you can then use unused annual allowances from the three previous tax years.
Carry forward may be particularly useful to you if you are self-employed and your earnings fluctuate significantly each year, or if you are a company director of a limited company and you wish to make a large lump sum pension contribution following a successful business year.
So if you are considering starting a pension, contributing to existing arrangements, or if you feel you are nearing, or have breached your annual allowance, then contact
one of our advisers here at Lovewell Blake Financial Planning Limited
to discuss your options.