Most of us understand the benefits of investing tax efficiently. Using the tax allowances, such as ISAs, provided by the government each year means we can avoid paying unnecessary tax. However, many of us are missing out on the valuable tax savings available through our pensions.
Pensions are one of the most tax efficient ways to save for your retirement. If you’re a UK taxpayer, in the 2023/24 tax year you can get tax relief on pension contributions of up to 100% of your earnings or a £60,000 annual allowance, whichever is lower. In simple terms, the tax relief you receive on pensions means some of your money that would have gone to the government as tax goes into your pension instead.
The current rates of high inflation mean that any savings you hold in cash are at risk of losing their value over time, you could consider investing additional lump sums. Redirecting any savings into your pension may mean you will be able to enjoy more of the good things in life when the time comes to retire.
Alternatively, some of us have seen our income reduce during the last couple of years and have seen increased expenditure due to the cost of living crisis, which has affected our existing financial commitments. For example, having to reduce contributions to our pensions. If you are self-employed, your income will almost certainly vary from year to year, sometimes reducing the amounts you are able to contribute to your pension and your allowable tax reliefs.
However, whether you find yourself with more, or less to save, you can take advantage of any unused allowance from the previous three tax years, subject to allowances and limits. This is commonly referred to as ‘carry forward relief’.
Carry forward allows unused annual pension allowances from previous tax years to be carried forward and added to the annual allowance for the current tax year.
The example below shows how you could benefit. Considering the annual allowance was previously £40,000, there is £50,000 unused annual allowance from the previous three years. Added to the £60,000 annual allowance, £110,000 could be contributed to the pension and receive tax relief in the 2023/24 tax year.
Tax year | Annual Allowance | Total contribution | Unused allowance |
2020- 21 | £40,000 | £10,000 | £30,000 |
2021 – 22 | £40,000 | £30,000 | £10,000 |
2022- 23 | £40,000 | £30,000 | £10,000 |
However, unless you run your own limited company, your earnings must be at least equal to the amount that you are looking to contribute at that point. So, in this example, to contribute £110,000, you would also have to earn at least that much in the current tax year.
Carry forward can be a valuable way of ensuring you don’t miss out and pay unnecessary tax. Whether that’s because you have additional savings to invest in your pension, or you need to temporarily reduce your financial commitments and would like to benefit in the future.
If you would like to learn more, please get in touch now and stop paying tax unnecessarily.
Tax treatment varies according to individual circumstances and is subject to change.
Approver Quilter Wealth Limited & Quilter Mortgage Planning Limited. 25 April 2023
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