COMMENT
Seven Weeks Left For This Tax Relief

By Alison Hunt (TMFAlly)
December 13, 2005

With the New Year just around the corner, many of us will soon be starting to think about New Year's resolutions and there are generally a few financial issues that come high up on that list. In particular, one topic that always seems to come up is pensions. With so many of us moving job regularly, it becomes harder and harder to keep track of our retirement funds and pensions need to be regularly assessed to ensure our projected income at retirement is what we'd expected.

However, there is one aspect of pensions that needs immediate attention, as it is due to be abolished in just seven weeks time!

Each year, we are allowed to pay a certain amount of money into our personal pensions, depending on our age and earnings. Workers under the age of 35 can pay up to 17.5% of their salary, rising to 40% for those aged sixty and above.

Payments are made net of basic rate income tax, meaning that the taxman will pay an additional £28.21 for every £100 we pay in - essentially 22 per cent (the basic rate tax) on the sum of £100+£28.21. Higher rate taxpayers can claim a further tax relief up to the 40 per cent level, gaining a refund of £23.07. Even non-taxpayers will gain basic rate tax relief on contributions up to £2,808, each year.

Many of us fail to pay the maximum into our pensions each year. However, there is a way to "mop up" the previous year's unused allowance, known as "carry back". This means that we can make pension contributions now, but have them classed as though they were made last year.

However, carry back is due to become a thing of the past on 31 January 2006 due to the imminent overhaul of pensions in April 2006.

So what does this mean for you? Well, it all depends on your personal circumstances. Anyone wishing to mop up unused allowance from the previous year should contact their pensions provider and check how much they can pay in, and can usually do so quite easily, by sending a cheque.

Carry back is most useful for basic rate or non-taxpayers in 2005/6 who were higher rate taxpayers in 2004/5. Essentially, they will be able to carry back their extra pension contribution to 2004/5 and claim tax relief at the higher rate. So women currently on maternity leave, workers taking career breaks, self-employed people with fluctuating salaries or those that have retired this year are some of the many who could find themselves with a nice tax refund.

We can only carry back to the previous tax year, no longer, and the carry back scheme is only available for personal pensions. If you wish to use the carry back facility you'll need to complete form PP43 from HM Revenue & Customs.

The carry back facility is a good way to be more tax efficient, especially if you fall into one of the above categories. However, it's worth remembering that from April 2006, we will be allowed to contribute up to 100 per cent of our salaries into our pensions, with an initial upper limit of £215,000 each year.

Find out more in our Pension Centre.