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Carry forward: What to consider for business owner clients

21 January 2020

The benefits of topping up clients’ pension contributions with unused allowances from previous years are often overlooked. Here, we consider employer contributions...

Bread rolls

With the end of the tax year looming it’s time to ensure all available allowances are being used (where possible, of course).

One of these – the annual allowance for pensions – can sometimes be overlooked. For those owner managed businesses among your clients, now is a good time to assess if extra contributions can both help top up their retirement provision as well as reduce corporation tax bills.

Care needs to be taken because of the complex interaction between employer contributions, employee contributions and the tapered annual allowance rules. After a positive 2019 in most global markets, the impact of the lifetime allowance may also need to be watched.

However, those that run their own companies and control their own remuneration are in a better position to ensure they can use their available allowances.

Here is one example where this is true…

Carry forward case study: Jan’s flexible income

Jan owns her own business and has historically made all contributions to her pension through her company to save on national insurance (both for the company and for her). Though Jan’s salary is only £11,000 per year, she takes significant dividends of variable amounts each year.

Care needs to be taken in cases like this because dividends, although not pensionable, are part of the tapered annual allowance calculations as they are subject to income tax.

In this year Jan has taken her usual salary of £11,000 and plans to take £100,000 in dividends, although hasn’t currently. The company has significant cash reserves and she is keen to extract them tax efficiently. 

(Note the 2015/16 tax year was split into two mini tax years for the purposes of the annual allowance as part of transitional rules announced in the Budget – we include it here for clarity).

Tax year  Standard annual allowance  Tapered annual allowance  Employer contribution   Carry forward  Total annual allowance available (incl. carry forward) after in-year contribution
 2016/17  £40,000  £40,000  £20,000  £20,000  £20,000
 2017/18  £40,000  £30,000  £20,000  £10,000  £30,000
 2018/19  £40,000  £40,000  £20,000  £20,000  £50,000
 2019/20*  £40,000  £40,000  Nil  £40,000  £90,000
* Before proposed dividend payment and pension contribution

If you look at the above in isolation it appears that Jan could, via her company, pay in £90,000 to her pension this year.

However, doing so would trigger the tapered annual allowance rules because her threshold income (salary and proposed dividends) would be in excess of £110,000, and her adjusted income (salary, proposed dividends and employer contribution) would be in excess of £150,000.

As a result, her annual allowance would only be £14,500 for 2019/20, due to the fact that she would lose £1 of annual allowance for every £2 of adjusted income over £150,000, and an annual allowance tax charge would be due on £25,500.

In this case it could be simply rectified by reducing the level of dividends she plans to take to ensure her threshold income does not exceed £110,000. Her company would then be able to pay the whole £90,000 as an employer pension contribution. She would also regain some personal allowance which would otherwise be lost under the personal allowance tapering rules.

Jan's company should also be able to claim corporation tax relief on the pension contribution, as long as it satisfies the ‘wholly and exclusively’ rules. This basically means that the contributions shouldn’t be excessive for the work done by the employee. In Jan’s case, as she owns her own business and does all the work, it should not be a problem.

Carry forward hints and tips

  1. Work from accurate figures – don’t guess anything.
  2. Always request a pensions savings statement.
  3. Get full details of income for tapered annual allowance calculations, including: salary; bonus; dividends; rental income; savings income.
  4. Always double check tapered annual allowance calculations before and after planning contributions.
  5. Use appropriate calculators (such as this one from HMRC) for carry forward (and fully document all calculations in your client files)

Carry forward rules

Carry forward rules allow unused annual allowance to be carried forward from the three previous tax years. The key points of carry forward (covering both employee and employer contributions) are:

  1. The individual must have been a member of a registered pension scheme in the tax year from which the unused annual allowance is carried forward. There is no requirement for the member to have paid any contributions or had benefit accrual during those years.
  2. The annual allowance in the current tax year must be used first before utilising carry forward from previous years.
  3. The earliest available unused annual allowance (of the three previous tax years) must be used first.
  4. Any contribution for carry forward does not need to be made to the same registered pension scheme that an individual was a member of in the previous years.
  5. Personal contributions need to be within 100% of the individual’s relevant UK earnings for tax relief purposes in the actual year the contribution is paid.
  6. Employer contributions can also be used for carry forward and are therefore subject to the annual allowance. These contributions will be subject to the HMRC ‘wholly and exclusively’ rules for corporation tax relief purposes.
  7. Carry forward is not available for DC contributions if the money purchase annual allowance has been triggered, e.g. by drawing an UFPLS.

How can the Zurich Intermediary Platform help?

Whether it is paying an additional single contribution to maximise a client’s available pension contribution in this tax year, or setting up a regular contribution for the first time to use future allowances, it can all be done online.

If it is a new tax wrapper that needs to be set up for an existing client, we will just require client confirmation of any adviser charge being established, and a direct debit mandate if appropriate.

There are no additional platform costs associated with this tax planning exercise and these contributions (including pension relief at source) are pre-funded, making sure your clients’ money is working for them as quickly as possible.

As we approach the tax year end, timing is important to ensure the transactions are completed on time. We have also published a schedule of platform deadlines for the 2019/20 tax year to help.

Find out more about the Zurich Intermediary Platform.

The tax position will depend on the personal circumstances of the investor and tax rules may change in the future.

For use by professional financial advisers only. No other person should rely on or act on any information in this article when making an investment decision. This article has not been approved for use with clients.

Zurich is a trading name of Sterling ISA Managers Limited. Sterling ISA Managers Limited is registered in England and Wales under company number 02395416. Registered Office: The Grange, Bishops Cleeve, Cheltenham, GL52 8XX.

Zurich Intermediary Group Limited. Registered in England and Wales under company number 01909111. Registered Office: The Grange, Bishops Cleeve, Cheltenham, GL52 8XX.

This article was last reviewed in January 2020.