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Carry favour

New rules on eligibility and contributions for personal pension plans (including stakeholder) have opened up many opportunities for pension and tax planning. This is especially so where an individual also has an existing retirement annuity contract (s226).

Although carryback will not be available on PPP contributions paid between now and April 5, it is still worthwhile paying a PPP contribution. Contributions get basic rate tax relief up front.

For higher-rate taxpayers, any contribution paid in 2001/02 will not only have the effect of reducing the balancing payment of tax due on January 31, 2003 but can also reduce the two payments on account for the 2002/03 tax year due January 31, 2003 and July 31 2003 by one-half of the January 2003 balancing payment reduction.

It is worth reminding ourselves that carry-forward has not ended for holders of S226s and that the deadline for making a contribution to be carried back is the end of the tax year for these policyholders.

The carryback rules for S226s did not change with the introduction of new carry back/carry-forward rules for personal pensions at the start of 2001/02. If an s226 contribution is paid before the end of the tax year, this can still be carried back to 2000/01. The timing of the tax relief is not quite as advantageous as the immediate relief obtained for contributions paid just before January 31 but nevertheless there should not be a long delay in getting the Inland Revenue&#39s cheque in the post.

As an alternative to a cheque in the post, the decision to carry back could be delayed until within 35 days of a tax bill being due (the next is due July 31) and an offset could be obtained against that tax bill. Remember that for S226s it is still possible to delay making a decision on carrying back until January 31 after the tax year in which the contribution is paid. For those without relevant earnings in 2000/01, the end of the 2001/02 tax year will also be the deadline for making an s226 contribution to be carried back to 1999/2000.

Individuals lucky enough to have s226 contracts will be able to take advantage of the best of both worlds and, as the rules for S226s and personal pensions will be running side by side for potentially another 40-plus years, IFAs will need to be aware of the differences when advising on the amounts and timing of contributions.

For example, let us consider Peter whose earnings fluctuate from year to year. Table one shows the possible s226 contribution each year and, as an alternative, the possible PPP contribution each year.

Bearing in mind that the PPP earnings cap does not apply to a tax year in which a PPP contribution is not paid, it would be possible to pay a s226 contribution in one year and a PPP contribution in another year to obtain the best possible mix.

The difference could be quite substantial, as can be seen in table two.

If Peter only contributes to his s226, the maximum contribution from the example is £138,000. If he only contributes to his PPP, the maximum is higher at £155,700 but alternating between the two can allow total contributions of £193,600.

It is also worth being aware that should contributions have been paid to a PPP (or PPP term insurance) which would have brought the PPP earnings cap into play that it would be possible to ensure that in the next tax year that no PPP contribution is made (and therefore the PPP earnings cap would not apply).

This would then allow the maximum contribution to a s226 and the ability to take advantage of unused s226 relief carried forward.

Based on the details in table three, Tony is upset to discover that he could have paid bigger s226 contributions over the past two years than the PPP contributions he actually paid.

A solution would be to suspend any PPP contribution in 2002/03 so that the PPP earnings cap does not apply.

He could then pay the maximum to his s226 for the 2002/03 tax year and also carry forward the s226 unused relief from 2000/01 and 2001/02, as in table four.

The benefits to Tony of being able to do this are not only that his contributions to PPPs and S226s are maximised but also that he has the best of both worlds by taking advantage of the contributions flexibility and lack of earnings cap with his s226 and the benefits flexibility of his PPP.

Indeed, having discovered the ability to still take advantage of carry-forward using his s226, Tony may decide to contribute to PPP in one tax year and to his s226 in the following tax year to take full advantage of the increased “simplicity” of pension planning.

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