Last chance to take advantage of pension tax break

Last chance to take advantage of pension tax break

Higher earners and their financial advisers are being warned this tax year is the last opportunity to take advantage of a higher tax break on their annual allowance.

Since tapered annual allowance was introduced in April 2016, for every £2 of adjusted income over £150,000 the amount of tax-relieved pension saving made by an individual or their employer that year is reduced by £1, down to a minimum of £10,000.

Taxpayers are allowed, however, to carry forward unused annual allowance amounts, with a limit of three years.

Which means that this tax year – 2018 to 2019 – is the last opportunity a continuous high earner has to make the most of any unused £40,000 annual allowance, according to Rachel Vahey, product technical manager at Nucleus.

Ms Vahey said: "Those continuous high earners who want to make the use of any untouched part their higher annual allowance in 2015 to 2016 should make a higher contribution before the end of the tax year.

"To do this, the high earner would need to have had a pension account in 2015 to 2016, even if they were not contributing."

Robert Gout, chartered independent wealth planner at WH Ireland, argued tighter restrictions in recent years have slashed the annual allowance an individual can pay into their pension while receiving tax relief by more than 80 per cent since 2010 to 2011.

He said: "These reductions may have frustrated many of those saving for retirement, but this year may provide an opportunity to make more sizeable pension contributions."

Pension contributions are restricted by the annual allowance - a limit on the amount that can be contributed to pensions each year, while still receiving tax relief -, which currently stands at £40,000 dependent on whether the taper applies.

Any personal contributions or those made by an employer or third party will count towards the annual allowance, while an increase in the value of benefits within a defined benefit scheme may also be counted, Mr Gout explained.

Taxpayers wanting to make use of annual allowance carry forward should take into account that the 2015 Summer Budget saw pension input periods aligned with tax years.

As a consequence, all pension input periods automatically ended on the day of the Budget, 8 July 2015, with a subsequent pension input period starting on the following day until the end of the tax year, he noted.

This means an individual could have had an annual allowance of up to £80,000 for the 2015 to 2016 tax year (i.e. £40,000 for the Pension Input Period up to July 8 2015 and a further £40,000 for the period from July 9 2015 to April 5 2016), of which any unused annual allowance for the period from July 9 2015 to April 5 2016 can be carried forward, he said.

Mr Gout warned, however, that "it is important to consider the effect that making an additional contribution will have on the lifetime allowance”.

The lifetime allowance represents the maximum amount of money a saver can invest in their pension pot - and benefit from tax relief at their marginal rate - before incurring an additional tax charge of up to 55 per cent.