Pension savers are urged to take advantage of tax relief that could add an extra £180,000 into their pension pot before April 5.
The end of the tax year signals the expiry of various allowances and exemptions like those for Individual Savings Accounts and capital gains tax, but possibly the most crucial for many earners this year will be the annual allowance for pension saving.
The annual allowance limits the amount someone can pay into pension schemes each year before they must pay tax. It is £60,000 in 2023/24.
Savers can carry forward unused allowance from the three previous tax years. This means an individual could contribute a maximum of £180,000 before the end of the tax year on April 5.
Anyone earning less than £60,000 a year is limited by an allowance for personal contributions instead equal to the total of their earnings in that year – but employer contributions can be made on top of this.
More than the AA can be saved into a pension annually, but the contributions will not benefit from tax relief, and if the AA is exceeded, inadvertently or otherwise, savers might be faced with an unwelcome or unexpected bill from HMRC when tax relief is clawed back.
Gary Smith, retirement specialist at Evelyn Partners explained today’s savers can’t be too relaxed and assume that they will always have the opportunity to top up their pensions with the bonus of relief at their highest rate of tax.
He said: “This year, taking advantage of pension tax relief is perhaps more important than ever. Not only is the growing tax burden eroding incomes and wealth but also we will have a General Election this year and who knows what could happen to pension tax relief and the annual allowance under a new government.
“Higher and additional rate pension tax relief is the cat with nine lives when it comes to tax reform drives by successive Chancellors looking to raise extra revenues. It has come under the Treasury spotlight regularly over the last decade or more, usually around Budget time, and escaped unharmed – to the relief (pun intended) of many of the UK’s pension savers.”
The annual allowance for pension contributions is not ‘use-it-or-lose-it’ in quite the same way as the ISA allowance or CGT exemption, as the option to claim previous years’ unused allowances does exist under ‘carry forward’ rules.
But Mr Smith warned there no guarantee that the valuable personal tax relief or the higher annual allowance will be around forever due to the political and budgetary imperatives that could coincide over the next few years to water down generous pension benefits.
With personal tax allowances frozen, and almost everyone paying more in tax as each year goes by, pension saving is one of the few ways of mitigating fiscal drag and keeping more of one’s earned income.
The retirement expert suggested that everyone reflect on whether they can afford to lock away the funds until private pension access age, and whether making extra contributions makes sense in the context of their overall financial situation.
Those who are set to maximise their current year’s allowance can mop up any unutilised annual allowances for the three previous years thanks to carry-forward rules.
Mr Smith noted that the annual allowance was £40,000 until the current tax year. Still, that affords a maximum of £180,000 that can be paid into a pension in this tax year for those entitled to four years of the full AA, and whose earnings allow it.
But there are some rules and restrictions to note when considering carrying forward:
- “You must have first used up the current year’s allowance – so the first step is to get an accurate reading of this year’s contributions and take those to the limit.
- “To get tax relief on pension contributions that you make yourself, you need to ensure that the payments made in any tax year do not exceed earnings in that year. An employer is not restricted by an individual’s earnings so they are able to pay in higher sums on occasion.
- “You will need to have had a pension in each of the three previous tax years but you don’t need to have made any contributions and your new contributions do not have to be made into the same pension.
- “Allowances from the ‘oldest year’ are used up first and at the end of every tax year, the oldest year falls away. Therefore, any allowances not used from the oldest year – now 2020/21 – will be lost for good if they are not carried forward.”
He added: “Savers who have a lump sum via a windfall like an inheritance might be looking to boost their pension by using up carry forward allowances before April 5 but an important limitation on this is the second rule above – their ‘relevant earnings’ in this tax year.
“This is because, even if they have available allowances to the potential tune of £180,000, the amount they can put into their pension is still limited by their earnings in the tax year that they make the lump sum injection.”
