Pension Carry Forward – a valuable second chance

Wilds Financial Planning

There aren’t many times in life you are given a second chance to get something right and still reap the benefits. This is particularly true in the world of finances. After all, if we had the opportunity to go back and invest even a small sum of £100, imagine the benefits that any one of us could reap. Perhaps you’d go back to the 1970s and invest in a little known tech company called Microsoft or Apple, or maybe you’d go back to 2004 and give a certain Mr Zuckerberg a call about financing his radical new project.

One of the few areas in which we are afforded a second chance is in the form of the annual allowance applicable to pension contributions. Given the substantial amount of income tax relief offered via pension contributions, not to mention their value in terms of funding your future lifestyle, there is naturally a limit to how much you are allowed to pay in during a year. This is to avoid people misusing pensions solely for the purpose of tax planning, rather than for funding their own retirement.

The limit is currently set at £40,000 per year for most individuals, including both employer and personal contributions. However, there is the option of carrying forward any unused allowances from the previous 3 years provided that the individual was a member of a pension plan that they could have paid into at the time. For example, an old workplace pension or stakeholder plan that was setup years ago and hasn’t been paid into for many years.

This effectively offers any individual who has held a pension plan for a number of years a second chance to go back and utilise their annual allowances for years gone by. In contrast, other allowances, such as the annual ISA contribution limits, are established on a “use it or lose it” basis, meaning they cannot be carried forward if they are not used by the end of each tax year.

It is important to note that in addition to the annual allowance limit, personal contributions will only receive tax relief up to a maximum of 100% of the amount earned in the current financial year. As such, the scope for an individual to make personal pension contributions above and beyond £40,000 is not very common.

However, for business owners the opportunity can be much more valuable both from a business and personal perspective.

For example…

Dave has a Ltd company that has secured a big contract in the current company financial year ending on 31st March 2017. Dave estimates that the business will make a taxable profit of approximately £300,000 this year, resulting in a corporation tax bill of circa £60,000.

Dave has an old personal pension plan that he has not paid any contributions into for the past three years. As such he has the option of using his full annual allowance this year as well as carrying forward the previous years’ annual allowances as follows: –

2016/17 £40,000
2015/16 £40,000
2014/15 £40,000
2013/14 £50,000*
Total £170,000

* The annual allowance was reduced from £50,000 to £40,000 with effect from April 2014
Dave arranges for his Ltd company to make a direct employer contribution into his personal pension plan of £170,000 before 31st March and as a result, reduces the taxable profits of the business by the same amount. The company therefore only has taxable profits of £130,000, reducing the corporation tax bill down to approximately £26,000 for the year (representing a £34,000 saving).

Summary

The opportunity to go back and make up for lost time in relation to pension savings can not only help you to put your longer term financial plans back on track, but can also yield a substantial tax benefit in the present day, and is therefore a vital consideration for any company owners or individuals.

If you would like to delve into your financial past and investigate whether you can take advantage of a second chance, please feel free to contact us for an initial discussion on how we can help you make the most of this opportunity.

Please contact Wilds Financial Planning for more details on 0161 723 3211.

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