But Jim can still benefit from the 2010/2011 unused allowance by taking out a new pension arrangement. The pension input period for this new contract would end on 5 April 2014, allowing him to go back and pick up the £50,000 allowance from 2010/2011, so total payments will be back up to £240,000.
Keeping payments within the annual allowance avoids a tax charge but it is not a green light for tax relief on the contribution.
Individuals will only get tax relief on payments up to 100 per cent of their earnings. This means that if someone has unused annual allowances of £100,000, they must also have earnings of at least this amount in the current tax year to get full tax relief.
Where the employer is making the payment to an employee’s pension, then the company must be confident that the payment is allowable as a deduction from profits before corporation tax. It does not matter that it can cover the payment from the cash account – a common misconception. ‘Cash’ is not a profit and loss item.
The lifetime allowance should also be considered. This will drop to £1.25m from April 2014. Benefits taken above this value will suffer the lifetime allowance tax charge – 55 per cent if the excess is taken as a lump-sum. This may act as a moderator on the amount of current funding undertaken and could open the door for conversations around alternative ways of saving.
There is a window of opportunity to make larger tax-efficient contributions this year while the annual allowance is still £50,000. Although the opportunity will remain in future years, it will be at diminishing levels – the case made for ‘use it or lose it’.
Dave Downie is technical manager of Standard Life
Key points
The annual allowance cut from £50,000 to £40,000 for tax year 2014/2015 opens the door to pension funding for the current tax year.
Once the 5 April deadline has passed the amount that can be contributed will also start to wane, and will continue to do so for the next four years.
There is a window of opportunity to make larger tax-efficient contributions this year while the annual allowance is still £50,000.
