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Carry on contributing

Steve Latto, head of pensions at Alliance Trust Savings, says urgent action is needed to use carry-forward pension provisions before the tax year closes

It is a year since the Government cut the annual pension allowance to £50,000 and introduced carry-forward provisions allowing any unused annual allowance from the prior three years to be taken into account.

With the tax year-end upon us, clients have one last chance to use any unused allowance from the 2008/09 tax year.

The end of the tax year also provides a reminder for higher-rate taxpayers to check they are receiving the tax relief they are due.

An opportunity has arisen for high-earners with the reintroduction of carry forward. It may be possible to take advantage of bringing forward their unused allowance from the 2009/10 and 2010/11 tax year where contributions were restricted due to the antiforestalling rules.

The Government has set the annual allowance for those years at £50,000 for the purpose of carry forward. The “real” annual allowance which actually applied in the earlier years is irrelevant.

Therefore, if a high-earner was restricted to contributing just £20,000 in the 2009/10 and 2010/11 tax years, then that individual could make a contribution of at least £110,000 in this tax year.

This amount could increase if there was any unused allowance to bring forward from the 2008/09 tax year.

It is important to remember that to use any unused annual allowance from the 2008/09 tax year, any contribution must be made by April 5, 2012.

Interestingly, HM Revenue & Customs amended the carry forward guidance at the end of last year, which may prove an advantage to some clients.

If the pension input amount in 2009/10 or 2010/11 exceeded £50,000, HMRC confirmed that this does not reduce any amount brought forward from 2008/09 (or the following two years).

The revised interpretation, means that even if the annual pension payments in a transitional year are more than that year’s £50,000 transitional allowance, the excess will not use up any of the allowance for other transitional years.

For example, an unused allowance of £25,000 from 2008-09 is unaffected even if the pension payment in 2009- 10 is £55,000, which is £5,000 over the £50,000 transitional allowance. The full unused allowance of £25,000 from 2008-09 is carried forward.

“It is important to remember that to use any unused annual allowance from the 2008/09 tax year, any contribution must be made by April 5, 2012”

When considering whether carry forward may be applicable for your client, you must also remember that an individual must be a member of a pension scheme for the year they want to carry forward their unused allowance.

Being a high-earner and knowing how much you can contribute to your pension and receive additional-rate tax relief in recent years has not been easy to calculate due to the anti-forestalling regulations which were introduced in April 2009 and ended in April last year.

Before April 2009, the amount of tax relief a person could contribute and receive full tax relief on was fairly straightforward to calculate, as long as an individual did not contribute more than 100 per cent of their earnings and did not go over the annual allowance for the tax year in which the contribution was made.

The changes that the Government made in April 2009 may have caused confusion with high-earners as to whether or not they could claim back higher-rate tax relief on the contributions they had made between April 2009 and April 2011.

If high-earners have not claimed additional tax relief on these contributions, then they still can do so by writing to their local tax office or by claiming it via their self-assessment. You can still claim for unclaimed higher rate tax relief going back four tax years.

A 50 per cent rate taxpayer could be missing out on up to £15,000 in unclaimed tax relief based on them maximising the annual allowance of £50,000. A 40 per cent rate taxpayer is losing out on £10,000.

An individual’s pension scheme administrator will claim basic-rate tax relief but it is the individual’s responsibility to claim any additional tax relief.

With numerous changes to the rules that have governed how much individuals can contribute to their pension in recent years, it is possible that many higher-rate taxpayers have either contributed too little or too much and may have lost out on additional rate tax relief.

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