When not to use your allowances

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It’s the time of year when all good advisers will be talking to their clients about making the most of any used allowances, and this will often include using the annual allowance (AA) for pension contributions. But are there times when the advice should actually be NOT to use it?

Let’s look at an example:

Jo has UK relevant earnings of £46,000 in 2018/19 so is a basic rate tax payer, but has £5,000 surplus cash to make additional personal contributions above the 10% currently being put in to her workplace pension (5% employee matched by employer). She has applied for a promotion and is feeling confident that she will get the position which comes with a salary of £57,000 from April 2019.

If she puts the additional £5,000 into pension now she’ll get basic rate relief of £1,250 via relief at source. If she waits until 6 April 2019 (and gets the job), she’ll also get higher rate relief of an additional £1,250.

There is a benefit in waiting for anyone whose income is likely to increase and tip them into the next tax band, be it basic/higher or higher/additional – and not forgetting those whose earnings are pushing the £100,000 barrier, and who will therefore start losing their personal allowance.

When we head north of the border, there’s a lot more potential for clients to be on the boundaries, with five tax bands to navigate.

Also worth remembering that intermediate rate tax payers in Scotland will need to complete a self-assessment or contact HMRC for the first time this year to claim the additional 1% tax relief they are entitled to on any personal contributions. There are an estimated 874,000 individuals in this tax bracket and it will be interesting to see how many actually claim their entitlement.

Unlike many other allowances, the annual allowance can be carried forward (as long as the money purchase annual allowance hasn’t been triggered), so it’s not a “use it or lose it” situation. The ability to carry forward only falls away after three years, so we are currently in the last chance saloon for 2015/16. This was the year when pension input periods (PIPs) were aligned with tax years, so we had a split year. If you’re wanting to use this up then remember the pre-alignment AA was £80,000 with a maximum of £40,000 that could be carried forward into the post-alignment period, and it is whatever is left over from this that goes into your carry forward calculations for the last time this year.

The other “wait and see” situation applies to those hit by the taper. It is often the case that total income isn’t known until after tax year end, and therefore you can’t know what AA your client has for the year. If you know your client is caught then it could be worth keeping their contributions to a “safe” £10,000 (or whatever you work out is a safe minimum) plus carry forward, and mopping any additional allowance they may have in a later year.

So whilst using your allowances is normally sound advice, there are times when it may be worth pressing pause when it comes to pensions.

Senior Technical Consultant

Lisa is an Economics graduate who has been in the financial services industry since 2003. Prior to joining AJ Bell in 2014 she spent nine years working in senior technical and consultancy roles at a major SIPP and SSAS provider. Lisa is part of our Technical Team, responsible for providing regulatory and technical analysis to the business and outside world. She is also a regular speaker at adviser events.