Pension contributions are a tax efficient way to save for retirement. Income tax relief is given at the individual’s marginal tax rate on the gross contributions made, but tax relief may be lost if contributions are not made at the right time.
5 April 2019 deadline
5 April 2019 is significant in that any unused pension tax relief from the 2015/16 tax year is permanently lost if it is not used by that date. This is of particular importance to individuals with adjusted income of more than £150,000, who did not utilise all available pensions tax relief in the 2015/16 tax year.
The annual allowance
The maximum level of annual pension contributions that attract tax relief for a tax year, known as the annual allowance (AA), depends on an individual’s adjusted income for the year. In broad terms, adjusted income is taxable income, plus employer pension contributions. The available AA may vary depending on the level of adjusted income. Ordinarily the AA can range between £40,000 and £10,000. In summary:
- all individuals with adjusted income of less than £150,000 have a standard AA of £40,000;
- individuals with adjusted income of between £150,000 and £210,000 have a restricted AA - the standard £40,000 AA is reduced by £1 for every £2 of income above £150,000; and
- individuals with adjusted income of more than £210,000 have a restricted AA of £10,000.
The restriction has applied from the start of the 2016/17 tax year.
However, the AA for a particular tax year can be supplemented by utilising any unused pension tax relief (ie unused AA) carried forward from the three previous tax years.
How pension contributions are utilised
For defined contribution (money purchase) pension schemes, in broad terms, the sum of employer contributions and the grossed-up equivalent of amounts paid personally in the tax year are first utilised against the AA for the tax year, with any excess then being utilised against any unused AA from the previous three tax years, earliest years first. Any remaining excess contributions are ineligible for tax relief and may be subject to an annual allowance tax charge.
The position for defined benefit (final salary) pension schemes is more complex, but works on broadly the same basis.
Unused pension relief from 2015/16
The pension AA for 2015/16 was not subject to the restriction outlined above. Therefore, provided that you were a member (or deferred member) of a registered pension scheme in 2015/16, depending on the level of pension contributions made between 6 April 2015 and 8 July 2015, the maximum available pension tax relief is £40,000, irrespective of the level of your income in that tax year.
Why is this important
For individuals with unused pension tax relief from 2015/16 with current income of more than £210,000, this may be the last opportunity to make a sizeable one-off pension contribution. But note that in order to utilise any unused relief from 2015/16, individuals must first utilise their 2018/19 AA.
How can we help
It is important to understand the level of pension contributions required to utilise your unused tax relief. These calculations can be complicated, particularly when identifying unused relief from 2015/16, due in part to pension input period rule changes from 9 July 2015 which may need to be considered.
We can undertake the necessary calculations to identify the maximum level of pension contributions you can make to obtain the maximum tax relief at your highest marginal rate.