Stephen McPhillips, technical sales director, Dentons Pension Management, answers some typical questions asked of the firm’s support team around the annual allowance
Can unused annual allowance be carried forward?
Under current rules, the annual allowance on pension contributions is set at £40,000 but it may be possible to make pension contributions above the annual allowance by carrying forward unused annual allowance from the previous three complete tax years. However, there are some circumstances where a full annual allowance of £40,000 is not available to clients.
What limits apply under the MPAA?
If clients are subject to the money purchase annual allowance (MPAA) as a result of drawing income under flexi access drawdown or taking uncrystallised funds pension lump sums (UFPLS), tax relievable contributions are limited to £4,000 pa and carry forward is not available.
How is the AA affected by the tapered annual allowance?
The tapered annual allowance is different but can also affect tax relievable pension contributions. If a client’s ’adjusted income’ exceeds £150,000 and their ’threshold income’ exceeds £110,000 then they will be subject to a tapered annual allowance for that tax year. The tapered annual allowance will not apply to clients if they have a ’threshold income’ for a tax year of £110,000 or less, even if they have adjusted income of £150,000 or more.
If their threshold income exceeds £110,000 and they have an adjusted income of £210,000 or more in a tax year, they will have a tapered annual allowance for that tax year of £10,000. This means the carry forward available from that year will be based on the tapered annual allowance.
The 2019/2020 tax year is the first tax year in which members might be fully impacted by the tapered annual allowance in relation to carry forward calculations. This is because the tapered annual allowance was introduced with effect from 6 April 2016 and the carry forward calculations from 6 April 2019 will relate to the tax years 2016/17, 2017/18 and 2018/19. It is important, therefore, not only that you advise clients on what allowances they are entitled to if they are thinking about using carry forward, but also simply in terms of current year pension contributions; they may be restricted to less than £40,000 contribution because of their earnings and / or drawing benefits flexibly from a pension scheme.
What earnings are required for member pension contributions in excess of £3600 per annum?
You should also make your clients aware that tax relief for personal pension contributions in a tax year, including any carry forward, would only be available on the full amount provided their pensionable earnings in that tax year are at least equal to the gross amount of those personal contributions.
For example, if a client’s total gross personal contributions in a tax year were £50,000 (i.e. a net contribution of £40,000 and £10,000 basic rate tax credit), their pensionable earnings in that tax year would need to be at least £50,000.
Like the lifetime allowance, annual allowance and carry forward can be very complex subjects, so you should ensure that clients are aware what allowances they are entitled to and the restrictions that are in place.
