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As I’ve been given a limited word count to make this article “small & punchy” expect a few links to other articles to follow, possibly a few more links than I intended given my opening!!
When it comes to the AA there are three top tips I share at this time of year, the first being;
Make sure your clients are members of a pension scheme
This seems somewhat obvious, to use AA you must be in a registered pension scheme, but what about those that aren’t and the impact this has on future pension contributions?
Perhaps you have someone starting out as a self-employed worker, or setting up their Ltd Company. During the early years funding a pension is probably the last thing they want to do. But what about when they are making good money? Well if you have not been a member of a pension scheme previously, you cannot use carry forward. You must have been a member of a pension scheme in the year you are looking to carry forward from.
Even contributing £10 to a pension, which costs the self-employed £8 (assuming they are basic rate taxpayers) and Ltd Company £8.10 (assuming it’s an employer contribution) can give the ability to contribute £159,990 to a pension in the 2021/22 tax year, rather than £40,000 if they didn’t join a pension scheme in 2018/19. I’ve also assumed that the standard AA remains unchanged and the MPAA or Tapered AA doesn’t apply
After handily mentioning the Tapered AA near the end of point 1. Now is the time to double check your higher income clients and the effect the taper may have on them. Carry Forward may come to their rescue in avoiding an AA charge. There may even be scope to make a pension contribution to get them out of the taper and have a full years AA to use, although the equation becomes circular and has planning angles and pitfalls.
And if you can get your clients income down below the threshold, can you also do a bit more and get them out of the personal allowance trap with an effective rate of tax of 60%?
Decide if you are using carry forward or saving some AA for the future
Following on from taper planning, what about planning for those that will be tapered in the future? Carry forward only comes into the equation if you can exceed this year’s AA. So you are faced with a decision as to what is better, use all of 2018/19’s AA then go back to the 2015/16 tax year (and the fun of the pre and post-alignment pips), or would it be better to save some 2018/19’s AA if the taper is going to be a future issue.
It’s all about the maths when it comes down to the AA and carry forward, handily we have a calculator that can help with that!