Cash in by carrying foward

Substantial tax benefits are going unclaimed. By Iain Morse

MILLIONS OF savers are told each year that they should not waste the wonderful benefits of tax-free investment into a PEP. In the past few months the clamour from PEP providers has become all the greater, as the product heads into extinction.

Yet far less noise is made about the potential loss of an even greater tax benefit - that of pension contributions into a scheme while taking advantage of "carry forward" and "carry back" rules to maximise the tax break.

"Untold millions of tax relief both on personal pensions and additional voluntary contributions go unclaimed each year," points out Mary Craig, of Standard Life.

All pension contributions receive tax relief, linked to the amount of tax you pay. For instance, for every pounds 77 contributed towards a pension by someone on a lower tax band, the Inland Revenue contributes pounds 23.

This rises to pounds 40 for every pounds 60 of contributions for higher-rate taxpayers.

But the rules governing each type of pension provision differ widely. For instance, in the case of top-up pension schemes you must use or lose your contribution allowance within the tax year in which it arises.

Top-up schemes allow you to contribute up to 15 per cent of the year's pensionable earnings on a regular or single-premium basis. Contributions are paid net of basic-rate tax, with any high-rate relief being reclaimed at the end of the tax year.

Those who are self-employed or are in un-pensioned employment can make provision by means of a personal pension plan. Contribution limits are banded by age as a percentage of earnings; the minimum limit is 17.5 per cent of earnings, going up to a maximum of 40 per cent.

Allowances for taking up any unused relief through a personal pension offer some worthwhile financial planning opportunities. The core of these are in the rules on "carry forward, carry back".

"Carry forward" is a facility to use up any unused relief from the previous six tax years in the current year by paying a single premium that aggregates some or all of this unused relief. Although you are claiming unused allowances from previous tax years, relief is based on current tax year rates.

This means that if you are a high-rate taxpayer in the current year you will qualify for high-rate relief on the contribution, despite the fact that you may have been a low-rate taxpayer in some or all of the previous relevant tax years.

If you make a pension contribution based on more than your current year's earnings, the Inland Revenue will automatically back-date your claim over the previous six years to find unused relief that can be carried forward to absorb this excess contribution.

Unused relief is only carried forward from previous years after you have made a maximum contribution for the current tax year, and the total amount carried forward in one year cannot exceed net relevant earnings in that year. This means you may have to spread "carry forward" over several years.

"Carry back" is a separate allowance allowing you to back-date a pension contribution to the tax year previous to the current one. Choosing this option also allows you to "carry forward" over the six tax years preceding the previous tax year - so you can roll up any unused relief over a total of seven years.

The exact rules are complex. Taking qualified advice from an independent financial adviser (IFA) is recommended.

To obtain the number of an IFA near you, call 0117 971 1177