Complicated tax rules can mean top earners miss out almost £60,000 in tax relief when they pay into a pension.
From April 6, additional rate (45%) income taxpayers earning more than £150,000 will see their annual pension allowance tapered by £1 for every £2 earned.
For retirement savers earning £210,000, the annual allowance drops to £10,000.
However, although this year’s annual allowance is impacted by the taper, these taxpayers can go back three years to carry forward any unused annual allowance to top up their pension, according to financial firm Alliance Trust Savings.
The firm gives an example of someone who earns £400,000 in this tax year (2016-17) who has not paid any money into a pension since March 2013.
This gives a total contribution of £130,000 to carry forward.
How the tax break works
This year’s allowance is £10,000, comprising £8,000 cash and £2,000 pension contribution relief, plus an extra £2,500 tax relief claimed through self-assessment.
The total tax relief on a £8,000 contribution adds up to £4,500, costing the taxpayer £5,500.
To put the maximum into a pension of £140,000 (£130,000 + £10,000), the pension saver would see the figures pan out like this:
- Pension contribution: £112,000 net of £28,000 tax relief of 20% at source
- Additional rate pension contribution relief claimed by self-assessment: £35,000
- Net cost of the £140,000 pension contribution to saver: £77,000 (£112,000 – £35,000)
- Total tax relief: £63,000 (£28,000 + £35,000)
Brian Davidson, of Alliance Trust Savings, explained the pension saver gains extra tax relief of £58,500 with carry-forward (£63,000 – £4,500).
Don’t overlook carry forward rules
“Pension rules are complicated and it’s easy to miss out on pension tax breaks if you are not careful,” he said.
“If you are unaware of carry forward but could benefit from the rules, missing up to £58,500 is losing a significant amount of money that could make a big difference to the fund size at retirement.”
Davidson also pointed out that other allowances, such as the money purchase annual allowance and lifetime allowance may impact on the amount someone can contribute to a pension in the 2016-17 tax year.
“Pension rules are confusing and if you are earning more than £150,000, you really do need to consider professional advice to make sure you get the figures right,” he said.
