Tax Year Changes

March 14th, 2019

Unused allowances from earlier years

The annual allowance sets the maximum possible tax-efficient total pension contribution from all sources at £40,000 per tax year. The allowance has been unchanged since April 2014, when it was cut from £50,000. However, even the £40,000 limit is scaled back if, very broadly speaking, your total income (not just earnings) plus employer pension contributions exceed £150,000. At worst, this cuts the annual allowance to a £10,000 minimum.

The scope to catch up on contributions that could have been made, but were not, is limited to just the last three tax years. These annual allowance rules mean that a pension strategy which relies on occasional large one-off contributions is best avoided in favour of regular contributions made throughout your working life.

The process for picking up the last three tax years’ unused allowances is know as carry forward and can involve some complex calculations, particularly if you are or were an employed member of a final salary pension scheme during that period. Obtaining the necessary data can be a slow exercise, so the sooner you start, the better.

In 2018/19, theoretically you and/or your employer could contribute as much as £160,000 without incurring any tax penalties. However, in practice, the actual figure will nearly always be less: determining how much less requires a detailed assessment of you and your employer’s contribution record, both actual and deemed. The end of the tax year creates additional pressure, as 5 April 2019 will also be the last day in which unused contributions can be carried forward from the 2015/16 tax year.

Higher automatic enrolment contributions in 2019/20

From 6th April, many employers and employees will see their pension contributions rise because of increases to the automatic enrolment contribution rates scheduled long ago. The table below shows the changes and an example of the increased weekly outlay based on an employee resident in England and earning £26,000 a year, assuming the employer makes the minimum required rate of contribution.

Employer

Employee

2018/19

2019/20 2018/19

2019/20

Contribution rate (1)

2% 3% 3% 5%
On weekly earnings between (£): 162 – 892 166 – 962 162 – 892

166 – 962

Extra weekly outlay (2) £3.26 (+48%)

£5.25 (+65%)

 

(1) Usually no contributions are automatically required for employees whose earnings do not exceed £10,000 a year.

(2) Employee figure allows for tax relief at 20%. The employer will normally be able to offset contributions against profits for tax purposes.

For many employees, the increase in their auto-enrolment pension contributions will more than outweigh the savings from the Budget changes to the personal allowance and national insurance contribution (NIC) bands (worth in total about £2.98 a week if you are currently a basic rate taxpayer outside Scotland), meaning net pay for the employee in the example will drop in April by £2.27 a week. If you pay tax at the higher rate in the current and next tax years (again outside Scotland), the net extra outlay will typically equate to only about £3 a month. You will be paying over 80% more in net pension contributions and extra NICs, but this is almost entirely offset by the tax savings from the increased personal allowance and the new £50,000 higher rate threshold.

Use it or lose it

ISA contributions operate on a simple tax year basis. If you do not contribute up to the maximum, you cannot carry forward your shortfall to future tax years. To gain the most from ISAs, you should aim to invest as much as you can afford each and every tax year. For example, had you placed the maximum in ISAs since they first were available, you would by now have sheltered over £200,000 from UK income tax and capital gains tax.