How contractors can shelter £200,000 in a single tax year

As previously reported on Contractor UK, the annual allowance for pension tax relief changed earlier this year for the worse, shrinking from a warchest-esque sum of £255,000 to a measly £50,000. Thankfully though, writes Tony Harris, founder of IFAs ContractorMoney, some contractors are today able to take advantage of complex transitional rules to use ‘carry forward’ of unused allowances this tax year.

‘Carry Forward’ rules - overview

These carry forward rules initially allowed contractors who had not used their allowance from the previous three years to roll up missed investment. In 2010/11 tax year this means you could contribute up to £150,000 into a pension. However, some contractors found the procedure very restrictive as any contributions made in the previous three years that had exceeded £50,000 would eat into the amount that you can invest this year.

Revenue rethink returns £150k investment opportunity

For example, if you had invested £150,000 last year then you would have used your £50k allowance from 2008/9 and 2009/10, so you would have been restricted to just £50k allowance this year. But the taxman’s quiet relaxation of the carry forward rules, last week, now means that this contractor would be able to use their full unused £50k allowance from 2008/9 and 2009/10, this year. So this allows them to invest £100k from previous allowances, and £50k from this tax year, returning a total investment of £150,000. The latest update on the rules from HM Revenue & Customs makes clear that the annual allowance from earlier tax years is not used up where the £50k threshold has been exceeded in either 2009/10 or 2010/11.

Act now

Yet don’t hang around. Contractors who wish to make use of these changes to the carry forward rules need to act quickly, as contributions must be made in the 2011/12 tax year in order to benefit from tax relief on the full amount.

Top-up to £200k with an input change?

In addition, and for those contractors able to shelter even more from the taxman, changing your pensions ‘input period’ could allow you to invest twice for this tax year too - in effect borrowing scope from 2012/13 tax year relief. This, combined with the carry forward change outlined above, could enable you to invest up to £200,000 in a single year and make a dramatic tax saving!

How an IFA can help

An Independent Financial Adviser will be able to assess the level of unused allowance that you can make use of this year; explore whether input year changes could be of benefit and ensure that you invest in a suitable pension to meet your retirement goals. But whether you take professional advice or not, be under no illusion. This really is a one-off opportunity – and it ends on April 5^th 2012. So make sure you make the most of the tax relief available on an investment of up to £200,000 while you still can.

Tony Harris is founder and managing director of ContractorMoney, the specialist Independent Financial Advisers for Contractors.