Hear from Clare Moffat, Head of the Development and Technical team on the five common tax year end issues, including carry forward problems and how to solve them, and how to maximise end of year pension funding for your clients – and gain 50 minutes CPD.
Clare Moffat and Fiona Hanrahan discuss your top five frequently asked tax year end questions, including how to evidence carry forward calculations and what happens if your clients trigger the money purchase annual allowance.
Hi. I’m Clare Moffat and welcome to our latest podcast. Today, we’re looking at the most common questions which come up before the end of the tax year. I’m joined by Fiona Hanrahan, who’s going to answer my questions.
So Fiona, when you use carry forward, do you need to inform the provider or HMRC? Is there a form to fill in?
Hi Clare. You don’t need to inform HMRC or the provider that you’re using carry forward. There used to be forms for this purpose, but they’re not in existence anymore. We would though recommend that the adviser and/or the client keep records of any calculations in case there’s a query in the future.
Great. If you make a payment using carry forward, which tax year is it classed as paid in for tax relief purposes?
The contribution or payment will be classed as paid in the year that it’s actually paid. Carry forward remember is concerned with carrying forward unused annual allowance, not tax relief. Tied to this is remember, that if the contribution’s an individual contribution, the member will need earnings of at least the level of the contribution in order to receive tax relief, regardless of whether carry forward’s used or not.
And if you’ve triggered the Money Purchase Annual Allowance, how does this impact your defined benefit funding, including carry forward?
When you’ve triggered the MPAA, your annual allowance for any DC or money purchase arrangements will be £4,000. If you have a DB scheme as well, you can still use carry forward and will have the remainder of any unused standard annual allowance available. For example, if you pay £4,000 towards a DC arrangement, you’ll have £36,000 annual allowance left for your DB scheme. This obviously assumes the taper doesn’t apply too.
When does a payment need to be received by to be classed as paid in the tax year?
The deemed date of payment is the important date here and this needs to be before the end of the tax year.
When it comes to a cheque, the date the cheque is given to, or if posted, received by the scheme administrator.
When it comes to a debit or credit card, the date on which the details are received by the scheme administrator is the important date to look at.
And when it comes to a direct debit, the date authorised to draw the sum from the member’s bank account, i.e. the date set out in the direct debit mandate. This is subject to the proviso that:
Different providers may have their own rules in addition to this, so it’s important to be aware of these. Also remember weekends and potentially Easter holidays which may land around the tax year.
How do you work out your unused annual allowance if the tapered annual allowance applies?
Carry forward is certainly still an option when the taper applies. When it does apply, you’re simply working out your annual allowance using the taper reduction calculations, then taking account of any contributions paid in the current year and your previous three years. Remember the parameters in the taper calculation changed with effect from 6 April 2020, so your taper calculation will be different for any year prior to 6 April 2020.
Thanks Fiona. We know that there are often questions around tax relief and relevant earnings at this time of year. Many of these relate to redundancies. Can you tell me a bit more?
Sadly, many people have been made redundant in 2021 and often this isn’t the situation they would have wanted to find themselves in. They might have long service, so a large amount of the redundancy payment could be taxable and remember, anything over £30,000 and other payments such as salary, holiday pay or payment in lieu of notice are classed as employment income and count as relevant UK earnings for tax relief and pension purposes.
For clients in their fifties, paying a pension contribution is very attractive as access is close and it’s very tax efficient. But action needs to be taken now before the end of the tax year as they might not have relevant earnings in the next tax year. These people are likely to have the carry forward available to support a large contribution too, but that would need to be checked as well.
And are there any issues that those receiving large redundancy payments should be thinking about?
Definitely! It could push their taxable earnings over £100,000. Then they’d start to lose personal allowance on a 2:1 basis until they lose it completely. This is known as the personal allowance tax trap. But if a pension contribution is made, it will reduce adjusted net income and could get someone out of this horrible tax trap where 60% tax is paid and instead, there’s 60% tax relief. We have a great example of this in our tax year end materials.
It can be even better if the employer pays that final contribution via salary exchange as there’s the National Insurance saving as well, so nearly 67% tax relief. The same logic applies to those with large bonuses.
There’s going to be changes to National Insurance and dividend tax from 6 April 2022 and more changes in 2023. Can you give a bit more detail about that?
Sure. This isn’t something that’s going to impact this tax year, but it’s worth mentioning as we’ve been answering quite a few questions on this. This will be spent directly on health and social care.
For the 2022/23 tax year, the levy will be implemented by an increase in the rate of Class 1 and Class 4 National Insurance Contributions which means that anyone over state pension age and working won’t pay it as an employee.
The increase will be 1.25% for employees, employers and the self-employed. Income tax on dividends will be increased by 1.25% as well. So a business owner taking a mix of salary and dividends could see themselves paying this tax three times.
There’s been a bit of a question about how it will work from 6 April 2023. It will be a standalone levy, so it will then catch anyone, including those over state pension age, who are working. But importantly, the Health and Social Care Levy Act 2021 states that it will be calculated in the same way that National Insurance is calculated and on the same amount. This means that if there’s a contractual agreement to salary exchange and salary is £45,000 instead of £50,000 for example – then the 1.25% will be charged on the £45,000 and not the £50,000.
That’s great, Fiona. Thanks for going through all of the answers to those common questions today. And thanks for listening to our podcast.