Tax Planning prior to 5th April 2007 - Pension Contributions
March 2007
Under the new pension tax rules which applied from April 2006, the number of tax planning opportunities available to self-employed contributors are now somewhat limited. In particular:
1. Carry back - There is no longer any carry back facility, so that contributions paid by members only qualify for tax relief in the year in which they are paid.
2. Limit on contributions - members of pension funds can contribute up to 100% of their relevant UK earnings, subject to an over-riding limit of £215,000 for 2006-2007.
3. No carry forward - The right to carry forward unused relief from year to year was abolished some time ago.
4. Tax relief on contributions made - Where an individual makes pension contributions in a tax year and although having sufficient income to cover the contributions made, has paid no tax in the year, the tax relief deducted from the pension contributions is not recoverable by HMRC.
5. Age limit - Once a contributor to a pension fund reaches age 75 years there is no further tax relief available on contributions made.
6. Recycling - Where a member of a pension fund makes a contribution and at the same time, or within a short period, draws down a tax free lump sum from the pension, he may fall foul of the "recycling" provisions, under which the lump sum effectively funds all or part of the pension contribution. Where the lump sum does not exceed £15,000 the recycling provisions do not apply, so this rule only applies to those making substantial contributions. If the recycling provisions do apply, the lump sum becomes taxable, defeating the attempt to maximise tax relief in this way. It is worth noting that for members aged 50 and over, up to 25% of the fund may be drawn tax free at any time, and if done in part to fund contributions at a modest level can increase the tax relief obtained to 50% for a higher rate taxpayer.
