With higher rate pension tax relief under serious threat, 'carry forward' while you can

18 February 2020

Despite the recent Cabinet reshuffle resulting in a swiftly replaced Chancellor of the Exchequer, and the budget only just confirmed to be going ahead on March 11th, there are still rumours abounding over what may or may not be included. 

One of the biggest areas of speculation is that the Government may choose to scrap the higher rate of tax relief on pension contributions as it seeks to raise funds to support increased public spending. According to HMRC forecasts, pension tax relief is expected to cost around £40 billion this year [1], with the biggest beneficiaries being higher rate tax payers. The future of higher rate relief on pension contributions has been in doubt since former Chancellor George Osborne ordered a Treasury consultation in 2015 but backed down on an overhaul. 

While the current system of tax reliefs may yet survive the latest threat, leading financial advice group Tilney, argues that their continuation cannot be taken for granted and therefore higher earners who are in a position to do should consider maximising pension contributions in advance of any potential changes. While the annual pension allowance for most people is a gross amount of up to £40,000 – meaning the net cost for a 40% tax payer is just £24,000 - those who have already maximised their current year allowance can also mop up any unutilised allowances for the three previous years, under “carry forward” rules.

Gary Smith, chartered financial planning at Tilney, looks at the benefits of carrying forward:

“Unlike ISAs which are an annual ‘use it or lose it’ allowance, under the current rules, savers can ‘carry forward’ any unused pension allowances from the previous three tax years once they have first fully used the current year allowance. Allowances from the oldest year are used up first and at the end of every tax year, the ‘oldest year’ falls away. Therefore, any allowances not used from the oldest year – now 2016/17 - will be lost for good if they are not carried forward.

“There are a couple of extra things to note when thinking about carrying forward. Firstly, to get tax relief on pension contributions that you make yourself, you need to ensure that the payments made in any tax year do not exceed earnings in that year. An employer is not restricted by an individual’s earnings so they are able to pay in higher sums on occasion.

“The ability to carry forward can be extremely useful for those looking to catch up on pension contributions because they are underfunded or because their financial position has improved and they are now in a position to do so. It is particularly useful for those whose current year pension contributions are now restricted by the tapered allowance because they have a total income over £150,000. For anyone in this position, which can see their current year allowance drop to as low as £10,000 if they are in receipt of £210,000 or more then the opportunity to mop up unused allowances from previous year is one that should be seriously considered, especially if their earnings in those years were below the threshold for the tapered allowance.

“Carry forward has further benefits beyond retirement planning as maximising a pension can potentially remove funds from your estate for inheritance tax purposes and gives options to pass on wealth to your heirs in a very tax efficient way.

“However there are also potential pitfalls. With the pension lifetime allowance now set at £1.055 million, care needs to be taken to ensure that contributions and growth in your investments won’t take you over this limit, as you will be liable for a tax charge on the excess when benefits are taken.

“With higher rate pension tax reliefs increasingly looking like they are living on borrowed time, it has never been more important to ensure you are taking full advantage of every allowance available to you. The ability to carry forward your pension allowances provides a great opportunity to reduce your tax bill and save for retirement. As always, make sure you seek advice from your financial planner.”

[1] Tax relief on employee savings is forecast to be £21.2 bn, while the cost of tax savings on employer contributions into occupational pension schemes is estimated to be £18 bn.

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years.  Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.

We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the YourMoney.com Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.