Pension allowance
Written by Ray Coman
The pension allowance is the maximum amount of pension contribution upon which tax relief can be obtained. The allowance applies regardless of the number of schemes into which contributions are made.
Defined benefit and defined contribution
Unused allowance brought forward
Cumulative unused allowance going back six years
Annual allowance excess charge
Non-residents entitlement to brought forward allowance
Defined benefit and defined contribution
Different rules apply to calculating the ‘contribution’ by defined benefit schemes. In this case, the employer should provide a calculation of the value of inputs for each period. Defined benefit schemes or money purchase schemes are still operated by some government bodies. Nearly all employers now offer only defined contribution schemes and here the “input” is the simply the funds paid into the scheme.
The allowance can be on the page listing the Pension rates.
Tapering of the allowance
The first year for which tapering of the allowance applies is 2016-17.
Since 2019-20, the allowance has been £40,000. However, it is abated at a rate of £2 for every £1 that the “net relevant earnings” exceed £240,000. The allowance cannot be reduced below a minimum of £4,000. A lower limit of £4,000 can apply for individuals who have already started drawing benefits from their pension. This £4,000 applicable to individuals who have started receivng a penjsion is referred to as the "Money Purchase Annual Allowance (MPAA)"
Net relevant earnings
Net relevant earnings are broadly the same as taxable income, plus:
- Employee’s pension contributions; plus
- Employer’s pension contributions; plus
- Any pension contributions make outside of a workplace scheme.
Doctors who are self-employed are make superannuation. This is another term for pension contributions where made for NHS work conducted on a self-employed basis. These types of contribution are not treated as net relevant earnings in the annual allowance calculation.
Unused allowance brought forward
The unused allowance for a tax year is calculated as: The maximum amount after any tapering, less any contributions for that year.
If the allowance is utilised for one tax year, it is possible to utilise any unused allowance for the preceding three tax years, earliest year first. To recap, the order in which the allowance is used as follows:
- Current tax year; then
- Any unused from three tax years ago, then
- Any unused from two tax years ago; then
- Any unused in the prior tax year.
The input for 2015-16 is complicated because this was the a transition year. The following year tapering was introduced. Any calculation which includes 2015-16 is more involved. However, the HMRC caluclator can assist with ensure the allowance is calculated correctly.
Cumulative unused allowance going back six years
If the pension allowance has been exceeded for any of the preceding three years; it is necessary to look back further to obtain an accurate calculation of the unused allowance brought forward. In that case, it is necessary to look back three years from the first year in which the ‘in-year’ allowance was exceeded.
For instance, the excess from three years ago will use up the unused from six years ago, leaving more unused five years ago. The excess from two years ago has more excess from five years ago to use up, and so on. Giving the calculator a complete six-year history often results in a lower pension excess charge.
Non-residents entitlement to brought forward allowance
A person can bring forward unused allowance for a tax year in which he or she was non-resident, only if a contributon to a registered UK pension scheme has been made at some point in that tax year. This ruling often means that a higher earner has some unused allowance in the year of arrival, if the arrival date is close to 5 April. It is also possible to bring forwrd allowance provided the taxpayer paid into a QROPS alist can be found via the following link: https://www.gov.uk/guidance/check-the-recognised-overseas-pension-schemes-notification-list
Annual allowance excess charge
There is no tax relief available for any pension contributions that exceed the available allowance.
Furthermore, to the extent that the pension allowance is exceeded for a given tax year, there is a charge. The charge is the taxpayer's marginal rate of tax applied to the excess contribution. The annual allowance charge can be calculated via the following HMRC link: http://www.hmrc.gov.uk/tools/pension-allowance/index.htm
Tax planning
Consider increasing the amount of pension contributions before the end of the tax year to utilise any unused pension contributions for preceding years before these expire.
The tax year in which the contributions will obtain tax relief is the same as the tax year in which the pension contributions are paid. It is not possible to ‘back-date’ a pension contribution. Therefore, the optimal time of year to assess the tax benefit of any additional pension contribution would probably be around January or February. The reason is that the start of the calendar year is where there is the least amount of forecasting about total income for the tax year but still enough time to arrange any additional payments. The tax year ends on 5 April.
Payments made via the existing workplace scheme are simply deducted from taxable pay as shown on the March payslip or P60. However, for payments from net pay, for instance to a Self-Invested Pension plan (or SIPP) the additional tax relief is obtained via the Tax Return.
Review the timing of bonuses.
Auto-enrolment requires that a fixed percentage of pay is transferred to the pension of an employee or director. Regular reviews should establish the extent to which the fixed percentage contributions are breaching the pension allowance.
Our service
Coman & Co can assist with the calculation of:
Available pension allowance; and
The excess pension allowance, plus the relevant adjustment to a Tax return to include this charge.
Any excess charge over £2,000 can be paid direct by the pension provider to HMRC.
A list of our fees can be viewed on the pricing page.
