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For many high earners, a key planning tool for limiting personal income tax can be pension contributions. However, the UK’s annual allowance, currently £60,000 (or less if the tapered annual allowance applies) can quickly become a limit you will encounter.
This is the combined limit on contributions that you, and others on your behalf such as an employer, can contribute into a pension policy without suffering a tax charge in any given tax year. It is not the limit you can contribute into a pension policy, which is a common misconception, but is one of the limits that determine how tax efficient your pension funding will be.
Use Carry Forward
HMRC allows you to “carry forward” any unused allowance from the previous three tax years.
- You must have been a member of a registered pension scheme in those years.
- You always use the current year’s allowance first, then dip into the oldest unused year.
- For personal contributions (not employer/company contributions), you must have the earnings to support the contribution in the same tax year it is made.
Carry forward is often the simplest way to keep contributing to your pension scheme and attracting tax relief, reducing the amount of tax you will pay in the given tax year.
Value of Advice
The rules around tapered annual allowance, adjusted income and relevant earnings are detailed and can change. A Wren Sterling adviser can:
- Calculate available carry forward accurately.
- Coordinate contributions across personal and workplace schemes.
- Ensure that you receive the correct amount of tax relief.
- Ensure that the underlying pension investment is fit for purpose and is projected to provide income in line with expectations.
Looking Beyond Pensions: Tax Shelter Products
If you’ve already used carry forward, or simply want to diversify, Venture Capital Trusts (VCTs) can be one alternative that is attractive for higher-rate taxpayers because:
- Up to 30% income tax relief is available on investments of up to £200,000 per tax year, provided the shares are held for at least five years.
- Dividends from VCTs are generally tax-free, and any growth is free from Capital Gains Tax.
VCTs carry higher investment risk and are not for everyone, but for those comfortable with the risk profile, they can complement pension saving, especially when annual or Lump Sum and Death Benefit Allowances constrain further pension funding.
The bottom line
Exceeding the annual allowance isn’t the end of your tax-efficient saving. With careful planning a qualified financial adviser can help you keep building wealth without handing more to the taxman than you need to.
This article is for information only and does not constitute advice.
The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.
VCTs are high risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital.
