Is The Writing On The Wall For Annual Allowance?

Is The Writing On The Wall For Annual Allowance?
Underwater by Andy Deitsch. Why?

If you’re thinking about making a sizeable pension contribution in the near future, do yourself a favour and review your Annual Allowance limit now, before it may be too late!

Evidence Suggests That Reducing Annual Allowance Is A Quick And Easy Way For The Chancellor To Raise Tax Revenue From Those Most Able To Pay It

Annual Allowance Has Had A Rough Ride In Recent Years

Following ‘pension simplification’ day on 6 April 2006, Annual Allowance enjoyed a few years of regular increases.  But a bombshell was dropped in the 2011-2012 tax year when it was slashed by around 80 per cent. 

It’s been reduced since.  And if you’re a high earner or if you’re drawing income from your pension and still making contributions, your Annual Allowance is now a tiny fraction of where it was in 2006.

The Recent History Of Annual Allowance

annual allowance carry forward

It won’t surprise you to learn that many people in the pensions industry believe Annual Allowance could come under further attack in the Budget later this year. 

It's backed up by a Freedom Of Information request by the Financial Times which has revealed the tax take from Annual Allowance has tripled in the last three years.

After all, it really only affects affluent people who make larger pension contributions.  As a result, reducing Annual Allowance could be a politically positive message, should the Chancellor wish to demonstrate he’s removing tax breaks for the rich, in favour of generating revenue for everyone.

Here is HMRC’s information on Annual Allowance.

Maximise Your Annual Allowance With Carry Forward

If you’re considering making the most of the current Annual Allowance rules to contribute a large sum into your pension, it’s worth knowing that the Carry Forward rules still apply.

Essentially, this could allow you to Carry Forward unused Annual Allowance from the three previous tax years, enabling you to catch up on contributions you may have missed.

There Are Two Conditions For Carry Forward

1. You must have been a member of a UK-registered pension scheme (this does not include the State Pension) in each of the tax years from which you wish to Carry Forward.  Membership of any registered pension scheme can qualify, even if you didn’t make contributions or you were already taking benefits.

2. You must earn at least the amount you wish to contribute in total this tax year (unless your employer is making the contribution).

Needless to say, it can be quite a complex area.  Here’s a technical summary from a SIPP and SSAS provider on the Carry Forward of Annual Allowance.

Annual Allowance and Carry Forward Calculator

Here’s a useful Annual Allowance and Carry Forward calculator.  There’s also a helpful factsheet there covering both Annual Allowance and Carry Forward in more detail.

How To Secure Tax Relief On A Contribution Of Up To £500,000

It really is possible to make such a large contribution on which tax relief could be available.  It applies to businesses funding a SSAS.  Annual Allowance limits apply, but if it’s tax relief you’re after, this article is worth a read.

Don’t Forget To Review Your Annual Allowance Entitlement

If you’re contemplating a pension contribution at some point soon, check out the links above to see how Annual Allowance and Carry Forward apply to you.

When it comes to Annual Allowance, it may not be a case of ‘buy now whilst stocks last’.

Though you never know!

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