Is my annual allowance £60,000?
In the March 2023 Budget the annual allowance was increased from £40,000 a year to £60,000.
The £60,000 limit only applies to the current tax year, so anyone wanting to use carry forward for the previous three years – 2020-21, 2021-22 or 2022-23 – will have a maximum annual allowance of £40,000 subject to all the conditions already mentioned.
The most they could put into a pension and get tax relief would be £180,000, so three times £40,000 plus £60,000.
What if my client has triggered the money purchase annual allowance?
If your client has started to take benefits from their pension then there are strict limits as to whether they can use carry forward.
If they have triggered the money purchase annual allowance then they cannot put more than £10,000 into their pension, unless they are still paying into a DB scheme, in which case they keep the £60,000 allowance for that scheme.
The MPAA is triggered when a client takes their pension pot as a lump sum or through several lump sums or takes income from it through flexi-access drawdown.
It is also triggered if the pension pot is used to buy an investment-linked or flexible annuity but not if they have bought a lifetime annuity with a lifetime income guarantee.
If the client has put a lump sum into flexi-access drawdown but has not taken any income then they can still use carry forward.
Moffat explains that clients who have fixed protection, and have been able to pay contributions since April 6 2023, may be able to use carry forward if they are a paid up or deferred member of a pension scheme.
In theory these clients have an unused annual allowance of £180,000 in 2023-24 as long as they are not impacted by the tapered annual allowance or MPAA, and have the earnings to support a contribution this year.
What about tapered annual allowance
The tapered annual allowance affects those on higher incomes and the earnings thresholds and minimum tapered annual allowance will vary from year to year:
Between April 6 2016 and April 5 2020
For every £2 of income over £150,000, a client’s annual allowance would have been reduced by £1, with a maximum reduction of £30,000.
This means anyone with an income of £210,000 would have an annual allowance of £10,000.
Between April 6 2020 and April 5 2023
For every £2 of income they have over £240,000, their annual allowance was reduced by £1.
The maximum reduction was £36,000, so anyone with an income of £312,000 or more had an annual allowance of £4,000.
From April 6 2023
Individuals who have taxable income over £260,000 have their annual allowance restricted.
It is reduced, so that for every £2 of income they have over £260,000 their annual allowance is reduced by £1.
The maximum reduction is £50,000, so anyone with income of £360,000 or more has an annual allowance of £10,000.
Can you use carry forward to put lump sums into a pension?
If a client inherits a large sum of money that exceeds their salary, then they can still only get tax relief on contributions of up to 100 per cent of their earnings, so they receive £200,000 but earn £50,000, tax relief will only be allowed on £50,000.
