Cash and carry ends

Want a gift of thousands of pounds from the taxman? Then act now to use up pension tax reliefs before the axe comes down on them next year.

Tax reliefs on pensions are about as generous as the Inland Revenue gets. The taxman hands back all the income tax you have paid if you put your money into a pension. So it costs a lower rate, 23%, taxpayer, only 77p to put £1 into a pension. If you are a higher rate, 40%, taxpayer, it costs just 60p to put £1 into a pension.

Where the tax reliefs become even more generous is that you can use up personal pension tax reliefs from previous tax years if you did not take advantage of them then. For example, say you are 38 years old and earn £40,000 a year. At this age, the Inland Revenue lets you put 20% of your salary into a personal pension with full tax relief, ie: £8,000. If you have been paying only £4,000 for the last six years, you have the potential to enjoy tax relief on £24,000 (six times £4,000).

But the government has decided that "carry forward" tax relief is over-generous and is scrapping it from April 5, 2001.

Scottish Life pensions guru Alastair Buchanan says: "The government said it would cancel it last autumn and despite protests, it confirmed that line recently to 'simplify matters'."

But with "carry back" - carry forward's close relation which will remain - Mr Buchanan calculates that pension buyers can go back as far as the 1992-93 tax year provided they act before April 5. He warns that you can count earnings only from employment but purchasers could use lump sums for the actual payment. "It is best suited for those with highly variable earnings."

The sort of professions he has in mind covers everything from actors to zoo owners. "Using carry forward can help gain higher rate tax relief in a good year, whereas you might only have had basic rate relief if you had bought the pension in the year you earned the money," he adds.

"You should consider maximising the use of 'carry forward' while you still can," says Frank Williamson, tax adviser at accountants Pannell Kerr Forster (PKF). "It will be a bitter pill to swallow if someone leaves it to the last possible minute, only then to find out that it is not possible to fully maximise the opportunity."

Carry forward is most useful to people who have had variable earnings and only applies to those who have personal pensions, not company pensions. PKF gives the example of one client, Sarah, 42, who owns her own mobile phone shop.

In the first year of her business, Sarah invested a modest amount into her personal pension. But with the boom in mobile phones, profits have risen and she can now "catch up" on the earlier years. She earned £48,000 in 1999 and used carry forward to catch up on £19,839 of contributions. The benefit to her was tax relief at the top rate worth £7,827.65.

Although there is another year before carry forward is abolished, there is an incentive to act before April 5 this year for lower rate tax payers. This is because the lower rate of tax falls to 22% from 23% on April 6, so the amount of tax you can claim back after that date will be smaller.

Legal & General says that if you pay in a £5,000 net contribution by April 5 it will be worth £6,495 with the 23% tax relief added in, but on April 6 it would be worth £6,410.

L&G's pension expert, Andy Agar, says that anyone wanting to use carry forward should speak to their financial adviser who will give you a single premium personal pension application form to make the payment. You also have to fill in Inland Revenue form PP42. Alternatively, you can contact L&G directly to obtain the forms.

One pensions adviser from Wolverhampton-based Torquil Clark warns that the Budget may contain a bombshell far bigger than the loss of carry forward relief. Every year there is speculation that the chancellor could remove the higher rate tax relief on pensions so that high income earners can obtain relief only at the lower rate band.

"There is a much stronger possibility that it might happen this year than there ever has been in the past," says Thomas McPhail of Torquil Clark. The advice is that if you haven't used up your full pension tax reliefs, do so quickly. The Budget is on March 21, so you'd better get your skates on.