Some studies suggest that less than 25% of people follow through their new year’s resolutions but what about tax year resolutions? For financial advisers the end of the tax year is often the most stressful period of the year. On 6 April 2019 you may have promised yourself to be more organised in the run up to 5 April 2020. Congratulations to those who have achieved their tax year resolutions but if you are part of the majority then don’t stress yet, there is still time!
When it comes to tax year end pension contributions the annual allowance (AA) rules are a key factor in determining the level of contribution but establishing a client’s AA position can be complex and time consuming. However, there are some things you can to make this process easier but before we look at these let’s start with a summary of what you need to know.
Whilst the AA rules apply to the member only, it’s not simply their contributions that use AA. Contributions by third parties and employers also use up the clients AA.
PIAs in 2019/20 will be tested against the standard AA of £40,000 unless the member is subject to a Tapered AA or Money Purchase AA (MPAA). If the total PIAs exceed the clients standard AA or tapered AA (see below for MPAA) then an AA charge will apply to the excess amount which will be taxed at their marginal rate unless they have unused AA available to carry forward to absorb the total PIA.
Carry forward allows those who use up the AA in any particular tax year to carry forward unused allowance from the previous three tax years so long they were a member of, a registered pension scheme in the tax year they want to carry forward from.
Keep in mind that its AA, not relevant earnings, that can be carried forward as this is often misunderstood. You can read more about the interaction of tax relief and AA here.
Those who have triggered the MPAA cannot carry forward to increase the MPAA limit for post trigger date defined contributions in any tax year. However, carry forward can still be used where the tapered AA applies for any tax year on or after 2016/17.
The AA rules are quite complex and we cover them in more detail in our Pruadviser knowledge library. I would recommend reading the following articles.
- Pension annual allowance & charges explained
- Pension annual allowance carry forward explained
- Tapered annual allowance - threshold and adjusted income
- What is the Money Purchase Annual Allowance - everything you need to know
So now we have touched on the rules, here are some things to think about when considering end of tax year pension contributions in relation to the AA rules.