Brought to you by
davenport-thomas-full-colour-logo.png

For nearly two decades, Davenport Thomas’s highly experienced team has worked closely with numerous accountancy practices to support their clients with a wide range of financial planning needs.

Save content
Have you found this content useful? Use the button above to save it to your profile.

The last chance to carry forward from 2020/21

8th Mar 2024
Brought to you by
davenport-thomas-full-colour-logo.png

For nearly two decades, Davenport Thomas’s highly experienced team has worked closely with numerous accountancy practices to support their clients with a wide range of financial planning needs.

Save content
Have you found this content useful? Use the button above to save it to your profile.

We previously wrote about the advantages of pensions carry forward in January and make no apologies for revisiting this as a reminder that you’ll need to act quickly to take advantage of the £40,000 Annual Allowance for 2020/21.

The last chance to carry forward from 2020/21 | Davenport Thomas | business accounting with saving money with hand putting coins on stack concept financial
Getty Images - lovelyday12 - money
A quick recap

  • On 6 April 2023 the Annual Allowance increased from £40,000 to £60,000 and the Money Purchase Annual Allowance (MPAA) and taper increased from £4,000 to £10,000
  • You must use up the Annual Allowance in the current tax year first, then go back to the earliest of the three carry forward years available
  • You must have been in a pension arrangement in an earlier year to have unused Annual Allowance to carry forward, although you don't have to have contributed. The definition of member is very broad and includes an active, deferred, pensioner and pension credit member
  • You can still use carry forward if the tapered Annual Allowance applies
  • If the MPAA applies you cannot carry forward unused Annual Allowance to a money purchase plan.

A case study to illustrate   

Phil has earnings of £150,270 and is happy to invest £100,000 into his pension, however he’s heard that his Annual Allowance is £60,000 for the current tax year 2023/24. As he has an existing pension, and he is currently making no pension contributions and has not contributed in any of the three previous tax years he can carry forward his unused Annual Allowance for these each of these tax years. Therefore, his total Annual Allowance, including carry forward, is £180,000 including tax relief.

This is made up of the following:

2023/24 Annual Allowance = £60,000

2022/23 Annual Allowance = £40,000 (carry forward)

2021/22 Annual Allowance = £40,000 (carry forward)

2020/21 Annual Allowance = £40,000 (carry forward)

                                        Total = £180,000

(For the purposes of this case study, we have assumed Phil was not subject to the tapered Annual Allowance in any of the previous tax years, which would otherwise be taken into account.)

To make a gross pension contribution of £100,000 Phil will only need to pay £80,000. The government will add 20% basic rate tax relief of £20,000. As a 45% top rate taxpayer he can claim back up to an extra £26,284.50, meaning his pension contribution effectively costs him £53,715.50.

Phil will also benefit from only being subject to Income Tax on his earnings from £12,570 (personal allowance) and £50,270 (the higher rate threshold). The total Income tax payable would be around £7,540 (20% of £37,700). This is an effective Income Tax rate of around 5% on his total earnings of £150,270.

Furthermore, as the pension contribution comes from profits in Phil’s limited company, it can be treated as an expense to the business, saving him Corporation Tax.  (As long as it meets the ‘wholly and exclusively’ rule.)

Contact us

If you or your clients are higher rate taxpayers, have savings and would like to discuss this further please book directly into my diary, drop me an email, or give me a call.

[email protected]
Contact number – 0208 6182077
Calendly - Richard Mumford

 

You are now leaving the AccountingWEB website and we cannot be held responsible for the content of this external website.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. A pension is a long-term investment not normally accessible until 55 (57 from April 2028).