Higher Earners – are you affected by the new tapered (restricted) tax relief on pension contributions? Read on for Possible Solutions…

My previous post November 23rd 2016 set out the rules for the tapered annual pension contributions allowance. Many higher earners are getting to grips with this and seeing that their ability to obtain (higher / additional rate) tax relief on pension contributions is severely restricted. This is bonus season, and a recent bonus may push you into this tapering calculation for your allowable pension contributions.

This is the first year of operation and  where an individual did not maximum-fund his pension contributions in previous years, they can use up available headroom from the previous three years (after first making maximum contributions in the current tax year). The maximum annual allowances are:

2016/17: (current tax year) £40,000 or as low as £10,000 if subject to tapering

2015/16: £40,000

2014/15: £40,000

2013/14: £50,000

So provided an individual was UK-based AND a member of a UK pension scheme at the time (regardless of whether  any contributions were made) in those three previous tax years, if their aggregate gross pension contributions (including employer contributions) were below the annual allowances, then the headroom can be carried forward and used in the current tax year. To do so, one must first use the current year’s, then you may go back up to three previous tax years, using the oldest first. As you can see, after we pass into a new tax year, the oldest of the three years falls away. Therefore, even if you cannot fully fund all of the headroom available, it would be sensible (where funds permit) to fund the current year and then go back and use the remaining allowance from three years ago – 2013/14 as it currently stands.

Give me a call if you have questions or need help with the calculations – 0345 013 6525.

Where carry forward is exhausted, higher earners may wish to look elsewhere for tax efficient long-term investments. These will include ISAs, Venture Capital Trusts (VCTs), (Small) Enterprise investment Schemes (SEIS and EIS),  investment bonds (onshore and offshore), maximum investment plans and other vehicles. Not all types of investment are suitable to an individual, so advice is needed when considering them.

I’ll be blogging more about these areas as we approach tax year-end, but since demand is high if you are contemplating making a last minute lump sum contribution into pension I suggest you do so several working days before April 5th, 2017 to ensure properly received and recorded by the pension provider.

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