Higher earners should use pension allowances before they are lost

What you need to know about carrying forward your annual allowance

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Andrew Cunningham
Published: 01 Aug 2017 Updated: 13 Jun 2022

Since 6 April 2016, people with income from any source amounting to more than £150,000, will have had their annual allowance for making pension contributions in that tax year restricted.

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The reduction means that the annual pension allowance has reduced from £40,000 to £10,000 for those with income over £210,000.

However, it is possible to carry forward any unused annual allowance from up to three tax years prior to the tax year in question. This is on the condition that an individual was a member of a registered pension scheme in the tax year they wish to carry forward from, and the current year’s annual allowance, even if this is restricted to £10,000, must have been used in full.

This is an important planning point for many high earners as, in previous years, the restricted annual allowance did not apply and they could carry forward much greater sums as follows:

 Tax year Relief available in 2017/18
2016/17£10,000 to £40,000
2017/18£10,000 to £40,000
Total£100,000 to £160,000

As a result, a high earner could potentially, in the current tax year, pay a pension contribution of up to £100,000. This assumes they have unused allowances to utilise, which would then attract income tax relief at the highest marginal rate.

Even for those who are not affected by a reduced annual allowance, it would be sensible to ensure pension contributions are paid at the earliest opportunity while there is certainty that tax relief at marginal rates can be obtained. In the run up to the last Budget, there was much speculation that a flat rate of income tax relief on pension contributions may be applied. While we are not privy to what the future may hold, if a flat rate is applied, it is very unlikely this will be at the equivalent level of higher (40%) and/or additional (45%) rate relief.

Another point to bear in mind is to consider where you stand against the Lifetime Allowance. This now places a cap of £1 million on the overall level of pension benefits you can accrue during your lifetime.

Calculating the level at which to make pension contributions is now a very complicated area and advice should be sought to ensure you do not run into difficulties while maximising the allowances available to you.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.


This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.