Personal pension planholders wishing to utilise the carry forward ununused relief facility have until 31 January to sign up to the valuable contribution tool
The final curtain is coming down on performing a carry forward exercise of unused relief under personal pension plans. It is of paramount importance to act now before this valuable contribution tool takes a final bow, as there will be no encore.
The facility to carry forward unused relief was abolished when the new personal pension tax regime was introduced on 6 April 2001.
However, by making a contribution before 31 January 2002 and electing this back to the 2000/01 tax year, it is still possible to carry forward any unused relief from the preceding six tax years (1994/95 onwards) into 2000/01.
The tax regime for retirement annuity contracts has not changed and, consequently, their carry back and carry forward rules remain unaltered.
Many individuals may have built up a sizeable amount of unused relief in earlier years because they were unable to fund their personal pensions to the maximum. If these individuals now have sufficient funds, this would allow them the pay a personal pension contribution to mop up this unused relief.
As already explained, a carry forward exercise can only be done in conjunction with a carry back contribution. The rules that must be followed to ensure the procedure is correctly performed are given in the box.
The following example, detailed in the table below, helps to illustrate the carry back/carry forward exercise.
Wishing to make the maximum pension contribution, Mr Smith chooses to carry back to the previous tax year 2000/01 and make a contribution of £3,960. He also wants to carry forward unused relief from 1994/95-1999/2000 of £9,641, which equates to a total possible contribution using carry back and carry forward of £13,601.
After ensuring that the above contribution does not exceed total relevant earnings in the year being carried back to (£19,800), Mr Smith also decides to make the maximum contribution for the current 2001/02 tax year of £4,000. He can therefore contribute a total of £17,601 (£13,728.78 net of basic rate tax).
Mr Smith sends a payment for the net amount of £13,728.78 to the life office, along with his application form. He also sends completed forms PP42 and PP43.
Whether or not Mr Smith is a basic or higher rate taxpayer will determine if he should send the original or copy PP42 and PP43 forms to the life office. The flow chart above sets out what action needs to be taken.
There is also a further advantage linked to the timing of tax payments for higher rate taxpayers. Self-assessment introduced the concept of payments on account. For the tax year 2000/01, there will have been two payments on account, the first was due on 31 January 2001 and the second on 31 July 2001.
The payments on account would have each been equal to half the tax liability of the preceding tax year.
There is then a final balancing payment due on 31 January 2002. By making a payment before 31 January 2002 and electing this back to 2000/01, it is possible, for higher rate taxpayers, to reduce or even eliminate this balancing payment.
Basic rate taxpayers will receive the tax relief on their contribution when they make the payment; higher rate taxpayers will be entitled to a further 18% tax relief that can be used to offset against the balancing payment due 31 January 2002.
The long running carry forward show is drawing to a close ' it is important to act quickly as the payment and carry back exercise must be completed by 31 January 2002 at the very latest.
A carry forward exercise can only be done in conjunction with a carry back contribution.
Under carry back rules, contributions cannot be carried back more than one tax year.
An investor cannot carry forward unused relief to cover employer contributions.
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