A Government amendment to pension tax rules will allow some investors to pay more into their pension pots by carrying forward unused annual allowance from previous years.
In April, the annual contribution allowance was cut from £255,000 to £50,000 and the Government introduced a carry forward mechanism, meaning contribution spikes will not face a tax charge provided total pension payments do not exceed £50,000 a year on average over the previous three-year period.
Under HM Revenue & Customs’ previous interpretation of the rules, anyone who made pension contributions totalling £150,000 in 2008/09, 2009/10 and 2010/11 could not carry any allowance forward, regardless of how the contributions were split over the three tax years.
The new interpretation means that if in any of the last three tax years investors have not reached the £50,000 limit, they can carry forward an allowance from that year.
For example, an investor who made no contributions in 2008/09 or 2009/10 but contributed £150,000 in 2010/11 will now be able to carry forward £100,000 of annual allowance for this tax year – £50,000 from 2008/09 and £50,000 from 2009/10.
Under the previous rules, they would not have been able to carry forward anything.
AJ Bell technical marketing manager Gareth James says: “This is an important change for investors who intend to make use of the carry forward rules in the current tax year. The old interpretation of the rules penalised those who had made sizeable contributions in the last couple of tax years.”
The Advice Lab director Fraser Grant says: “Thankfully, this change is an improvement for savers.”