The Government has decided that from April 2001 the rules applying to carry forward and carry back w...
The Government has decided that from April 2001 the rules applying to carry forward and carry back will change. The rules for carry back will be restricted and carry forward will be abolished. However, following a recent Inland Revenue concession, if it is combined with carry back, carry forward may still be used between 6 April 2001 and 31 January 2002,
These changes represent a classic marketing "window of opportunity" or "race to the deadline," offering many people valuable opportunities to save tax and boost potential income in retirement.
So it is clearly important that financial advisers understand the current situation and make sure that relevant clients can make the most of it. It is a complicated area where IFAs can really add value and should be an integral part of any "Pensions Healthcheck."
In simple terms, the existing carry back and carry forward arrangements allow people to catch up on pension contributions that could have been paid in previous years but were missed for one reason or another. In reality, few individuals pay the maximum level of contributions on which tax relief is available each year.
As retirement approaches, however, there may well be an identified need to increase pension provision. And if additional funds are available for investment, it may be desirable to pay contributions in excess of the normal limit.
Ways and means
There are two ways in which this can be done and still obtain tax relief on the whole contribution.
l Carry forward of unused tax relief from previous tax years.
l Carry back of contributions to a previous tax year.
Carry forward relies on the individual having unused tax relief in respect of the previous tax years. If the individual had a source of non-pensionable earnings but made no pension contributions, or the contributions made did not reach the maximum limit available in the relevant year, then the amount unused may be carried forward.
Although the principle is simple, that you can catch up on missed contributions and get full, current tax relief, there are a few basic rules which must be followed:
Before unused relief can be carried forward from an earlier year, contributions in the current tax year must first be used to cover the current tax year's contribution limit.
Unused tax relief can only be carried forward for a maximum of six years. This means that the current tax year's limit and unused relief for the previous six years can be covered by a single contribution. (This can be extended by a further year if used in conjunction with carry back).
After the contribution has covered the current year's relief, unused relief from earlier years is used up in chronological order, starting with the earliest year.
From 1989/90 the maximum amount payable as contributions to a personal pension plan have differed from those payable to a retirement annuity plan. Therefore the amount of any unused relief will depend on which type of contribution is being paid. The basis for calculating relief is determined by the type of contributions to be paid in the year to which unused relief is being carried forward.
Tax relief is given on the basis of the tax rates applying in the year in which the contribution is paid or deemed to be paid, not the rates for the years from which the unused relief originates.
Carried forward relief cannot be set against an employer's contribution to a personal pension plan. Employers' contributions must therefore fall within each tax year's maximum contribution level to obtain tax relief in full. Note that employers' contributions are treated like members' contributions in calculating the relief available.
Although employees pay contributions to a personal pension plan net of basic rate tax, all carry forward calculations should be done on a gross basis.
Contributions allowed in any tax year cannot exceed the amount of relevant earnings in that year, even if there is unused relief from earlier years still available.
Whereas carry forward allows unused relief to be added to a current year's limit in order to obtain tax relief on a larger contribution, carry back allows tax relief to be given in a previous tax year rather than the current one.
The basic principle for carry back is that once an election to carry back a contribution has been made, the contribution is thereafter treated as if it had actually been paid in the tax year to which it was carried back. Thus the contribution would be set against allowances for that year, including any unused relief carried forward, and tax relief would be given by reference to the rates applying that year.
The basic rules for operating carry back are: A contribution can normally be carried back only into the previous tax year, i.e. a payment made in 2000/01 could only be carried back to 1999/00.
There is an exception if there are no non-pensionable earnings in the previous year. In this situation contributions can be carried back to the year before that, ie if there are no non-pensionable earnings in 1999/00 contributions made in 2000/01 could be carried back to 1998/99.
The whole or part of any contribution may be carried back as long as there is sufficient unused relief in the year to which it is being carried back to cover it. It is not necessary to first cover the maximum contribution limit in the current year.
Once again, the total contribution deemed paid in any year to which carry back of contributions relates cannot exceed the amount of relevant earnings in that year.
Contributions made by an employer cannot be carried back.
Tax relief will be based on a calculation of tax liabilities for the year to which the contribution is carried back, not the year of pay
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