The annual allowance is £40,000 for all pension input periods ending on or after 6 April 2014. The carry forward allowance for the previous three tax years is £50,000 per annum (2011/12, 2012/13, 2013/14).
Note that an individual can only make a tax relievable pension contribution of 100% of earnings capped at the annual allowance, which in 2014/15 is £40,000. However, an employer does not suffer this restriction and can make contributions for an employee, as long as within the wholly and exclusively for business purposes rules.
The general rules
These are broadly:
- You must use the current year’s allowance first (the full allowance);
- You then carry forward unused allowances from the previous three tax years, using the unused allowance from the earliest year first;
- In order to benefit from carry forward you must have been in a registered pension scheme (even if not contributing) during that carry forward period;
- Where the individual contributes, this is a ‘net of 20% tax’ contribution. HMRC adds back 20% into the pension fund; and
- Where the employer contributes, this is gross and is generally a corporation tax expense.
You can over-contribute, but no tax relief is available on the excess and, if over the annual allowance, a tax charge is incurred. However, if you have unused carry forward allowances available to you, these are added to the current tax year and the charge may not have to be paid (if within the total allowable) (see HMRC’s Registered Pension Scheme manual, at RPSM06108010).
Two questions to be answered
Consider the following:
- If, in order to do carry forward of unused pension allowances (which could be as much as £150,000 over the past three tax years), must you contribute the full £40,000 current year’s allowance, before you can do so? For example, if you were a previous high earner, but only earned £20,000 in 2014/15, you can only contribute 100% of earnings, which is £20,000. Does this mean that as the full allowance of £40,000 for 2014/15 could not be contributed, therefore you are precluded from making any carry forward contributions under the rules? and
- Are each of the three carry forward years ‘earnings-tested’ to establish how much pension contribution you could have made in those tax years, and then are you only allowed up to that amount as a contribution, or is there a ‘blanket allowance’ of the maximum amount available to you?
A typical scenario could be that you have earned £20,000 in the current tax year, and 100% of earnings would be £20,000, being the maximum input an individual could make as a pension contribution. However, you have inherited £100,000, and your adviser mentions the carry forward rules to mop up unused pension reliefs from previous tax years. You had sufficient earnings to make contributions in the past three tax years.
How much earnings?
The individual in the above scenario cannot fulfil the maximising of the current year’s allowance of £40,000, therefore carry forward is denied. This is because the individual does not have the earnings to justify carry forward, even though he or she may have the funds to make a pension contribution.
Tax relief is still only available on individual contributions of up to 100% of earnings in any tax year. Assume Jim has made some pension input amounts in the previous three tax years allowing carry forward of £75,000. With the current year’s annual allowance of £40,000, this would give a total of £115,000. Jim would therefore need to have earnings of at least £115,000 to get tax relief on this amount of contribution.
However, if you are an employee, your company is not restricted and can make contributions in excess of your earnings, including the amounts available for carry forward, as long as ‘wholly and exclusively’ for business purposes. If the company required additional funds to do so, you could loan the company funds through your director’s loan account to do so. These gross contributions are usually allowable against corporation tax if they qualify.
Practical Tip:
Ensure you have earned income in the tax year the contributions are made (which does not include dividends) sufficient to cover the full annual allowance, plus carry forward allowances to be utilised. If not and you are an employee, contributions for the current year and carry forward years can be made by your company, but they must pass the ‘wholly and exclusively’ test.
