Pensions : How can I contribute more than the annual allowance & still get tax relief?

4 min Read Published: 15 Feb 2013

 Reader Question:

I’m trying to build up my pension fund as quickly as possible and I’ve already paid the maximum allowed (£50,000) in to my personal pension this year. I’ve been told that it is possible to pay more than £50,000 without being stung for a tax charge. Is this true?

My response:

Yes it is true. Ordinarily the maximum amount you can contribute to a personal pension plan and receive tax relief is 100% of your earnings (up to the annual allowance £50,000) or £3,600, whichever is greater.

But someone with a personal pension who wants to pay more than the £50,000 annual allowance, can do so by carrying forward any unused annual allowance from the previous 3 years, namely 2009/10, 2010/11 and 2011/12. So in theory it is possible to pay a pension contribution of up to £200,000 in one tax year and receive tax relief, assuming you have sufficient earnings.

The rules governing carrying forward pension contributions are complicated so seek professional financial advice before doing anything, as it’s easy to land yourself with a tax charge by doing something incorrectly. But the key points on carrying forward unused annual allowances are that

  • The individual must have been a member of a registered pension scheme (such as a personal pension plan) at some point during the tax year they plan to carry forward.
  • Although they do not have to have paid any money into the plan.
  • Unused annual allowances are used up in a strict order.
  • The annual allowance for the current year is used up first.
  • Then the carry forward of unused annual allowance, using the earliest carry forward year first and so on.

But if you have made large pension contributions on the 2009/10, 2010/11 and 2011/12 tax years the calculation becomes a bit more complicated.

  • If you made a pension contribution greater than £50,000 in 2010/11 the excess does not use up any amount of available annual allowance from the 2009/10 tax year.
  • But if you made pension contribution in excess of £50,000 in the 2011/12 tax year will use up unused annual allowance carried forward from the preceding years

Bear in mind that you can only claim tax relief on your contributions based on your income tax bill for this tax year i.e. the tax relief on the pension contributions can not exceed the income tax you would have paid. Plus where I talk about pension contributions I’m referring to the gross figure and include any contributions made by you or your employer

As I said, seek the help of a tax accountant or financial adviser before doing anything.

A more detailed explanation, with examples, can be found on the HMRC website here

I hope that helps

Damien

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