One such opportunity will shrink in the coming years for those who want to maximise contributions to their pension pot. That's because the amount that can be paid into a pension using “carry forward” will fall. At the same time, new rules have “tapered” the amount high earners can pay into a pension with tax relief given. These two factors combined means some could be sleepwalking into a nasty charge from the taxman.
We each have an annual allowance that determines how much we can contribute to a pension without being hit with a tax charge. Contributions of individuals and their employer, and any tax relief these receive, count against it.
“Carry forward” allows you to use unused annual allowance from previous years, so remember to make the most of this. There are rules to follow, one being that an individual must have fully used their current tax year annual allowance first. Another is that to benefit from tax relief you may not make a contribution using carry forward that exceeds your annual earnings.
You can take unused allowance from the three preceding years and add it to your allowance for the current year. So, for 2017/18 you can take unused allowance from 2014/15 onwards.
The Annual Allowance since 2014/15 has been set at £40,000. However, a special arrangement existed in the 2015/16 tax year that meant a higher annual allowance was in place – potentially as high as £80,000 – as a transitional measure. There’s more detail in our carry forward guide.
This has created a bigger window for carry forward. It exists now, but will disappear once the 2015/16 tax year falls out of the three-year calculations in April 2019.
Carry forward is arguably more valuable to higher earners now more than ever, due to the “tapered annual allowance” that came into effect in 2016/17, which reduced the total amount higher earners can contribute to a pension. Your annual allowance could be reduced if your “adjusted” income is more than £150,000 a year and your “threshold” income is more than £110,000 a year.
There are specific rules on exactly what’s included in each figure. In broad terms, threshold income includes your income from all sources minus pension contributions you’ve made, while adjusted income is all your taxable income plus pension contributions from net pay and those by your employer.
The usual £40,000 Annual Allowance reduces to £10,000 when your adjusted income hits £210,000. Establishing the figures for this calculation can be complicated. You can read more about exactly how these figures are calculated in our tapered allowance fact sheet at www.fidelity.co.uk/tapered.
We also have a guide to get you started.
To find out more visit www.fidelity.co.uk or call 0800 41 41 28
Ed joined Fidelity in 2016 following a 13-year career in newspaper journalism, most recently as investment editor at The Daily Telegraph. He was previously news editor and personal finance editor for Thisismoney.co.uk, the money channel for Mail Online and has contributed articles to the Daily Mail.
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The value of investments and the income from them can go down as well as up, so you may not get back what you invest. Eligibility to invest into a pension and the value of tax savings depends on personal circumstances and all tax rules may change. You cannot access your pension till aged 55. Pensions can be a complex area. If you are unsure we strongly recommend that you obtain financial advice to help you decide what action you need to take if any. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.