Advisers should act now to use ‘carry forward' to protect clients' tax relief on pension contributions ahead of the top tax rate cut, according to Suffolk Life.
The self-invested personal pension (SIPP) provider said the reduction in the top rate of tax will have an effect on relief on pension contributions, especially when using carry forward.
It said advisers should act now to ensure clients get the relief they expect.
Carry forward allows unused annual allowance from pension input periods ending in the three previous tax years to be carried forward and added to the annual allowance for the current pension input period.
Time is of the essence
Pensions technical manager Claire Trott explained: “A client carrying forward three whole years of annual allowance would need to be earning in excess of £200,000 to be eligible to reclaim all the tax.
“This would clearly mean they are a top rate taxpayer so the impending change to the top rate of tax could have a significant impact on their pension tax relief. “
For example in tax years 2010 -11, 2011-12, and 2012-13 the maximum tax relief that could be gained would be based on the 50% rate, however , for 2013-14 the maximum tax relief would be 45%.
Trott (pictured) said carrying forward to the 2012-13 tax year will ensure that the highest earners get the most tax relief from any unused annual allowance from previous years. This still gives three years’ worth of annual allowance tax relief at 50% and only one year at 45%.
If carry forward is used and contributions are all paid in the 2013-14 tax year relief is restricted to 45% of the gross contribution.
“In summary, £7,500 could be lost by waiting until 6 April. Time is of the essence. Advisers need to be certain what carry forward entitlement is available and how much taxable income your client has in order to determine the maximum contributions they can make,” added Trott.
“It is clear that, with the reduction to the top rate of tax and then the reduction in the annual allowance in 2014-15, waiting to act could result in a significant loss of eligible tax relief for high earners.”
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