Claim What’s Yours: The Secret to Maximising Backdated Pension Contributions

Planning for your retirement can seem daunting, but with the right strategies, you can turn it into one of the most tax-efficient investments of your life.?

One often overlooked opportunity is the ability to carry forward unused pension contribution allowances from previous years.?

Whether you're a high-earner looking to maximise tax relief or a business owner aiming to boost your retirement savings, understanding how to backdate pension contributions could help you unlock thousands in tax savings while building your financial future.

Your pension contribution allowance

Many tax allowances are available on a "use it or lose it" basis, but when it comes to your pension contribution allowance, you can carry forward unused elements from the previous three tax years. However, there are conditions to carrying forward any unused allowance, which we will cover later in the article.

It’s helpful to note that there is no limit to the amount of funds you can contribute to your pension, but there is an annual limit to funds on which you can claim tax relief. This is limited to the lower of your annual taxable income or ￡60,000 per annum.

If we consider the current tax year and the three previous tax years, the maximum pension contribution allowance was as follows:-

• ￡60,000 – 2024/25 tax year
• ￡60,000 – 2023/24 tax year
• ￡40,000 – 2022/23 tax year
• ￡40,000 – 2021/22 tax year

This equates to a combined pension contribution allowance of ￡200,000, on which you could theoretically receive tax relief.

Maximising your pension contribution allowance: How much will you pay?

The income range for a basic rate taxpayer is between ￡12,571 and ￡50,270; therefore, you would not be able to accommodate the full ￡60,000 allowance. In this instance, we will work out the net payment and tax relief on a ￡50,000 pension contribution:-

20% taxpayer

￡40,000 net + ￡10,000 tax relief = ￡50,000?

As high rate and additional taxpayers, potential income limits are well above the ￡60,000 contribution allowance. Therefore, the breakdown for those utilising their full allowance is as follows:-

40% taxpayer

￡36,000 net + ￡24,000 tax relief = ￡60,000

45% taxpayer

￡33,000 net + ￡27,000 tax relief = ￡60,000?

It's easy to see the significant benefits for all taxpayers, especially those in the higher echelons, and this is just for one year.

Can you imagine not only the accumulated tax relief benefits over a 40-year period but also the potential returns on your pension fund investments?

Those earning more than ￡260,000 a year

There is one caveat: someone earning over ￡260,000 a year (including pension contributions) will see their pension contribution allowance reduced by ￡1 for every ￡2 over that figure. The allowance can be tapered down to as low as ￡10,000 per annum, on which tax relief can be claimed.

Company pension contributions

When a company makes pension contributions for an employee, the funds count towards the employee's annual pension contribution allowance. However, while the employee won't receive any direct income tax relief because it's not money they've earned or paid tax on, it is effectively a tax-free contribution.?

Thankfully, the company also benefits by reducing its taxable profits, leading to savings on corporation tax. So, while there’s no direct tax relief for the employee, the employee and company still enjoy indirect financial benefits.

Who can use pension carry forward?

Before we look at the mechanics of pension carry forward, it’s essential to identify the terms of eligibility. There are two main requirements:-

• The individual must have been a pension plan member in each of the years they wish to carry forward unused pension contribution allowance.
• Each element of carry forward is limited to the lower of ￡60,000 or annual income, less any contributions made in that year.

So basically, you must have been part of a pension scheme for each year you wish to carry forward, and the degree of carry forward will depend on income during that year and any contributions.

How do the pension carry forward rules apply?

The pension carry forward rule allows you to add any unused pension contribution allowances from the previous three tax years to the current year's allowance, enabling larger contributions. However, this is capped by your earnings in the year you make the contribution.

How it works:

1. Current Year Allowance: Contributions first count towards your current year’s allowance (e.g., ￡60,000 for 2024/25).

1. Carry Forward: Any contributions beyond the current year’s allowance are applied to unused allowances from the previous three tax years.

1. In the example, excess contributions would be applied first to 2021/22’s unused allowance, then 2022/23, and finally 2023/24.

Key Points:

• You can carry forward up to three years of unused allowance, potentially allowing up to ￡200,000 in contributions if none were made in the previous years.

• However, your contribution limit is still capped by your total earnings in the tax year you make the payment.

• If your income is less than the combined unused allowances, you may need to stagger contributions over multiple years to maximise tax relief.

Example

If you make a ￡200,000 pension contribution in 2024/25, having failed to make any over the previous three years, ￡60,000 will count against the 2024/25 allowance. The remaining ￡140,000 will be deducted from the unused allowances starting with 2021/22. This preserves later unused allowances for future years.

How backdated contributions work for companies

It's important to clarify that there is no system for companies to formally backdate contributions to utilise an employee's unused allowances. However, there is nothing stopping a company from making a pension contribution in the current tax year, which also takes into account unused allowances in the previous three years.

In this scenario, as the employee has not paid income tax and national insurance on the additional pension payment, there is no element of tax relief available. However, as mentioned above, there is an indirect saving because this is not considered part of the employee's taxable income. Assuming an employer can demonstrate that these pension payments benefit the company and the employee (in the natural course of business), they should be deductible against profits and corporation tax.?

This is useful for business owners and directors to enhance their own tax-efficient retirement savings. The option to effectively cover unused pension contribution allowances can help boost pension funding where a company's profits and cash flow might be volatile. It is also a valuable means of avoiding tax on dividend income, although the pension funds would not be accessible until retirement.

This seems reasonably generous - could the government consider changes in this area?

Key considerations for individuals and companies

In recent years, we have seen significant changes in pension regulations under the "Pension Freedoms" banner, although some benefits may be restricted under the new government.?

There are several critical considerations for individuals and companies looking to contribute and also make backdated payments to pension arrangements:-

• Track annual pension contributions closely
• Avoid breaching annual and unused allowances
• Factor in changes in the pension contribution allowance
• Adjust for taper relief where applicable
• Always check eligibility when backdating contributions

While the Lifetime Allowance (LTA) was abolished in the 2023/24 tax year, removing the cap on maximum tax-efficient pension savings, it may return as part of future legislation. This could seriously impact the broader benefits of pension savings for higher-rate taxpayers. There is also speculation that we could see a reduction in the tax relief associated with pension contributions.?

Conclusion

With the potential for thousands in tax savings and a more secure retirement, now is the time to consider action on your pension contributions. Whether you're maximising current allowances or tapping into the power of carry forward, the key is to plan ahead and make informed decisions. Don’t wait for future regulatory changes to limit your options—start optimising your pension today and consult our financial advisor to ensure you're fully leveraging these opportunities.?

Planning ahead can help you avoid looking back with regret and wishing you had made those "obvious" adjustments. Should we put a date in the diary to review your options?

The Financial Conduct Authority does not regulate taxation and trust advice.

A pension is a long term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.

Pension savings are at risk of being eroded by inflation.

The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.