If you are one of the thousands of people who fill out a self-assessment tax return and made use of the special additional pension contribution allowance for 2015-16, remember to claim extra tax relief before the end of this month.
A number of investors made use of a special 'bonus' contribution for the 2015-16 tax year, relating to the government's decision to align pension input periods (Pips) this year. Those making contributions between 6 April 2015 and 8 July 2015 were able to make a further contribution of up to £40,000 before 5 April 2016, as long as total contributions did not exceed £80,000. Many higher-rate taxpayers also made the most of their last chance to receive tax relief on the full annual allowance of £40,000 before new rules curtailing the annual allowance for those earning more than £150,000, including employer pension contributions, came into force this year.
If you were one of those savers, you could be in line for a reduced July tax payment on your contribution. You claim it in your self-assessment tax return by the 31 July to avoid waiting for it to be resolved in January 2017 by HMRC.
Self-assessment tax payments worth half your previous year's tax bill are due by midnight on 31 January and 31 July. In most cases a one-off pension contribution automatically benefits from basic-rate tax relief at 20 per cent. But if you are a 40 per cent or 45 per cent taxpayer you qualify for further tax relief, which you need to claim.
Mike Fosberry, financial services director at Smith & Williamson, says a combination of new Pip periods and the impending cut to annual allowances has resulted in a large number of people making one-off contributions who might also need to claim extra relief.
He says: "We found there was a surge in people wanting to put extra funds into their pension in the run-up to 5 April 2016 to use the one-off additional allowances available in 2015-16 as a result of the pension year changes, and also before changes came into effect for the 2016-17 tax year to restrict the tax relief for those with incomes of £150,000 or more a year."
Since that date higher-rate taxpayers with adjusted incomes over £150,000 have no longer been able to receive tax relief on up to £40,000 in contributions. Instead, for every £2 of adjusted income over £150,000 your annual allowance falls by £1.
"Many people thought it may be the last opportunity to claim 45 per cent tax relief on pension contributions so they tried to make the best of the allowances that the government had made available," says Mr Fosberry.
When reducing your tax payments be careful not to reduce by too much. You could be subject to a fine if you don't pay enough tax. And if you do miss reducing your payments in your July return don't worry, the issue can be resolved later on.
"The 31 July payment on account deadline acts as a reminder to get a swift cash flow benefit ofthis tax relief rather than wait until you have submitted your tax return," says Mr Fosberry. "While the amount of tax you are ultimately liable for depndso nyour total erarnings, tax deductible expenses and your various allowances, there will be many people who could reduce their 2016 July payment on account because of the additional pension contributions they made."
Don't breach carry forward limits
At the other end of the scale, higher-rate taxpayers likely to be affected by the new tapered annual allowance and wanting to make the most of unused pension allowances from previous years should be careful not to breach their carry forward limit.
Carry forward allows you to use any annual allowance that you haven't used during the three previous tax years, provided you were a member of a registered pension scheme and have used up your current annual allowance first. But Gary Smith, financial planner at Tilney Bestinvest, says the new tapered annual allowance, which came into force on 6 April 2016, has left many at risk of breaching the amount they can contribute to their pension from previous years. This also means some investors are at risk of paying more tax.
Currently, the maximum you are allowed to carry forward from unused previous year allowances is £170,000: £50,000 from 2013-14, £40,000 for the following two financial years and £40,000 for the 2016-17 financial year, not counting any excess contributions connected to Pips. And this is as long as you earn at least the amount you are contributing.
However higher-rate taxpayers whose income exceeds £110,000 before employer pension contributions, and £150,000 including them, will now face an annual allowance cut of £1 for every £2 of adjusted income over that limit. If your adjusted income is in excess of £210,000 the annual allowance falls to £10,000.
If you breach either the annual or carry forward allowance you will be forced to add that excess contribution to your taxable income, and could even end up paying a higher rate of tax on it than if you hadn't made the contribution, says Mr Smith (see case study B).
"The fundamental difference this year is around the adjusted income figure (used to calculate the tapered annual allowance) and whether or not that figure exceeds £150,000," he explains. "That figure includes employment income, investment income, rental income, interest on savings and, crucially, employer pension contributions," says Mr Smith.
Tapered annual allowances can still be carried forwards in the same way as the standard annual allowance. That means that if an individual only has a £10,000 annual allowance for the 2016-17 tax year but makes contributions worth only £5,000, £5,000 can be carried forwards for use in the next three tax years.
"Establishing your carry forward allowance is the first step," says Mr Smith. "If you do have £130,000 available from the previous three years, even if you earn over £210,000 this year you are still able to carry forward so can plan and have some headroom."
Case study A: The impact of a tapered allowance on carry forward Individual A earns £130,000 per year with employer contributions of £40,000, resulting in an adjusted income of £170,000. That means a tapered annual allowance due to the £20,000 in excess of the £150,000 adjusted income limit. A £1 loss of every £2 adjusted income over £150,000 results in a £10,000 annual allowance cut, leaving Individual A with a £30,000 tapered annual allowance for this year and a total carry-forward allowance of £160,000 for this year (assuming no allowance was used in those years). Individual A could carry forward £10,000 from the earliest of the three previous tax years to avoid reduced tax relief on this year's contributions. |
Case study B: Exceeding contributions Individual B is a higher-rate taxpayer earning £145,000. B exceeds her carry forward allowance by £10,000 due to contributions in excess of £170,000 including employer contributions. B completes her tax return in the normal way but adds £10,000 to the income total, taking it to £155,000 and resulting in tax of 45 per cent on the £5,000 over £150,000. |
An example of how much you could carry forward
| Tax year | Annual allowance | Total contributions | Unused allowance to be carried forwards |
|---|---|---|---|
| 2013/14 | £50,000 | £10,000 | £40,000 |
| 2014/15 | £40,000 | £10,000 | £30,000 |
| 2015/16* | £40,000 | £10,000 | £30,000 |
| 2016/17 | £40,000 | £40,000 | £0 |
| £100,000 |
Source: Investors Chronicle
*Not counting bonus allowance relating to Pip alignment for 2015/16
