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Pensions and the Annual Allowance – am I missing out?

As covered in our recent corporation tax blog post, changes introduced in April have thrown profitability into the spotlight. Questions are being asked on how company profits can be legitimately reduced, to mitigate the impact.

Now is an ideal time for limited company owners to look at their business’ expenditure. Employer pension contributions can be an attractive option. But how can you be sure you’re making best use of what’s available? This guide aims to help with that.

How much can I contribute?

From the 23/24 tax year, the ‘Annual Allowance’ for pensions rose to £60,000. For most taxpayers, this is the maximum amount per tax year they can save in their pension, without incurring income tax charged. Prior to this, the Annual Allowance had been £40,000 since 2014.

It’s important to note the Annual Allowance covers contributions from all sources. Eg if you had an employed role for part of the year, ensure you consider pension contributions you may have received there. Plus it includes any tax relief given, such as the 20% government ‘top up’ afforded to personal pension contributions.

The Annual Allowance is subject to restriction based on a taxpayer’s income. Broadly speaking, if your total income for a tax year is expected to be £210,000 or above, then this restriction may apply. These rules can be difficult to grasp, so best to speak to a tax adviser if you’re unsure.

What happens if I don’t use all my Annual Allowance?

Even if you don’t utilise your full Annual Allowance in a given tax year, there are options available. So long as a taxpayer was enrolled in a registered pension scheme for all tax years in question, they are able to ‘carry forward’ any unused allowances for up to three tax years.

The key benefit of this is that in future tax years, so long as the annual allowance for that year has been fully utilised, a taxpayer can elect to offset further contributions against their brought forward unused allowances from the previous three tax years.

As above, the Annual Allowance for the year in question must first have been fully utilised. Then any unused brought forward allowances come into play. When they do, unused allowances from the earliest tax year are used in priority (sometimes referred to as a ‘First In, First Out’ or ‘FIFO’ basis).

Do you have an example?

Sure! Take a look at the image below, which illustrates how these rules might be used.

In the 20/21, 2021/22 and 22/23 tax years, this taxpayer made annual pension contributions of £20,000, £30,000, and £40,000 respectively. This leaves a combined additional £30,000 that can be contributed in 23/24 (on top of the £60,000 annual allowance) without there being any income tax implications.

As you’ll see, this taxpayer contributed £85,000 in 23/24, which is £25,000 above the £60,000 annual allowance. Therefore, £20,000 and £5,000 of unused allowances (from the 20/21 and 21/22 tax years, respectively) are brought forward to offset against the ‘excess’ pension input for 23/24.

The £5,000 of unused allowance remaining in 21/22 can be carried forward for a further tax year (up to a maximum of three years, i.e., up to 05 April 2025 in this example) after which the allowance is ‘lost’ if still unused.

So, what should I do now?

Pensions are a complex area of tax legislation, so it’s often best to seek professional advice before making any decisions. If you’d like more information on how the rules set out here could impact you, get in touch.

As “normal” accountants, we’re not FCA regulated. This means we’re not authorised to give investment advice. We therefore can’t guide you on the investments side of the pension, but can give tax advice on making contributions into the pension.

If you want more formal pension guidance, setting one up, what to invest in, or how much you’ll need to provide for your retirement, an Independent Financial Adviser should be able to assist.

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