UnaVida | Big Up Your Pension

Big Up Your Pension

Carry forward allows you to “Big Up” your Pension and make pension contributions more than the annual allowance, and receive tax relief. The use of Carry Forward can transform your pension “biggly”.

Making use of unused annual allowances

Carry forward allows you to make use of any annual allowance that you may not have used during the three previous tax years, provided that you were a member of a UK registered pension scheme in that period. You can use carry forward if you’re an active member currently building up pension benefits; a deferred member with paid-up pension benefits; a pensioner member, in receipt of pension benefits from your pension scheme, or a pension credit member, where you have a share of your ex-partner’s pension scheme. If the annuity policy is in the name of an individual and, when the contract was made, the annuity policy was not of such a type to be a registered pension scheme, then the individual cannot be a pensioner member and therefore cannot use this to qualify for carry forward.

Carry forward may be particularly useful if you are self-employed and your earnings change significantly each year, or if you’re looking to make large pension contributions.

To use carry forward, you must make the maximum allowable contribution in the current tax year (£40,000 in 2016-17) and can then use unused annual allowances from the three previous tax years, starting with the tax year three years ago.

You can’t receive tax relief on contributions in excess of your earnings in a tax year, and you only receive higher rate tax relief to the extent that you have paid it.

If you are self-employed and run your own business

If you run your own business, the situation is a bit different. One of the advantages of being an incorporated trader is the ability to switch contributions between the individual and the company, depending on nature and level of income from the business.

If the individual wants to make the contribution themselves with full tax relief on it, they need sufficient earned income (i.e. salary – dividends do not count for this purpose) to cover the contribution.

The company is able to make whatever contribution it likes to the employee’s pension fund, regardless of the amount of salary/ dividends the employee receives.

It is important that correct legal form is followed here – the company is not making the contribution on behalf of the employee (in which case it would be treated as an employee contribution) but is making an employer contribution in its own right.

As an employer contribution to a registered pension scheme, it does not count towards the employee’s remuneration from the company. The contribution does count towards the employee’s annual allowance but the individual can benefit from the carry forward rules.

In terms of the company’s profits, the payment is an expense of employing staff and in practice would be allowed as a deduction against trading profits of the company for Corporation tax purposes. The downside is that if the contribution is significant, it will reduce the amount of profit that is transferred to the company’s distributable reserves, which in turn may limit the amount of dividend that can be paid for the accounting period.

In addition, every deduction against trading profits has to pass a ‘wholly and exclusively for the purposes of the trade’ test. Although rarely challenged by HMRC in the past, HMRC may in the future choose to query large contributions. It is important to speak to decide whether it is appropriate to make contributions on this basis.

Why is Carry Forward such a burning issue currently?

Because tax relief on pension contributions may be withdrawn. Big it up!

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A pension is a long-term investment that typically cannot be accessed until age 55 (57 from April 2028). The level of pension benefits offered could change depending on the value of your investments (and any income they may generate).

The interest rates in effect at the time you begin receiving benefits may also have an impact on your pension income. The tax consequences of pension withdrawals will depend on your unique situation. In later Finance Acts, tax rates, tax bases, and tax relief may change.

The opinions expressed by Ray Best are meant to inform and educate. Before making any investment decisions always take advice that is pertinent to your investment personality and financial situation.

You are aware that past performance will not necessarily be repeated in the future, but you should be aware that persistent poor performance invariably will.

The value of an investment and the income from it could go down as well as up.

The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

UnaVida Wealth Management Ltd. is directly authorised and regulated by the Financial Conduct Authority (440577).

The guidance in this website is primarily aimed at a UK audience and is subject to regulation by the Financial Conduct Authority (FCA).

The Financial Conduct Authority does not regulate tax planning, estate planning, or wills and any form of legal documentation.