Consider using any unused carry forward UK pension contributions before UK tax year end
UK pensions have traditionally offered a great opportunity for UK and US persons alike to save towards retirement. From a UK perspective, pension contributions have typically allowed individuals to receive tax relief in the year of contribution, tax-deferred growth whilst funds remain within the tax wrapper, a tax-free pension commencement lump sum of up to 25%, and distributions from the pension at marginal tax rates. Additionally, UK pensions remain entirely outside of the pension-holder’s estate for UK inheritance tax purposes, providing a powerful planning tool for many families given the differential of estate tax thresholds between the UK and the UK. From a US perspective, to the extent that tax relief is limited, UK pensions have often provided a good opportunity to use excess foreign tax credits and establish cost basis in the account. This can be especially powerful if the individual anticipates living in the US during retirement where the US will generally have primary taxing rights on the UK pension under the US-UK tax treaty.
This current tax year (TY2016/17) brought a number of changes with respect to pension contributions. Anyone with applicable earnings of less than £150,000 is able to contribute up to £40,000 per year to their pensions. However for those earnings over £150,000 tax relief on current year contributions is scaled down £2 for every £1 of earnings and tax relief will be limited to contributions of £10,000 for those earning £210,000 or more.
The UK currently allows contributions in excess of the annual allowance by using any unused annual allowance from the previous three qualifying tax years as long as the individual was a member of a qualified UK registered pension scheme in those earlier years. Applicable prior year allowances are as follows:
2015/16 Up to £80,000
A special opportunity arose for some individuals related to 2015/16. In order to phase in the new pension relief rules, HMRC split the tax year into two pension input periods. The first running from 5 April 2015 to 8 July 2015 and the second running from 9 July 2015 to 5 April 2016. All individuals were given an £80,000 allowance for the pre-alignment tax year with a maximum of £40,000 able to be carried forward to the post-alignment tax year. So, individuals who funded their 2015/16 pension contributions prior to 9 July would have up to another £40,000 annual allowance available in relation to the 2015/16 tax year.
For any individuals who are subject to the tapered allowance outlined above, and for those who are worried about what future tax relief might be offered on pension contributions, maximising contributions now based on prior year carry forward allowances may be beneficial to consider.
For more wealth planning tips and tidbits from MASECO read our 39 Steps to Smart Living in the UK.
Risk Warnings and Important Information
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.