Act now to preserve pension benefits, says Old Mill

Farmers and rural businesses who want to use pension contributions to mitigate tax on profits in the coming years must act now, warns accountant Old Mill.

From April, HM Revenue & Customs is cutting the annual limit for pension contributions from £255,000 to £50,000. This will have a significant impact on businesses which typically make big profits one year and not the next, where pension contributions are often an important consideration in tax planning.

To soften the blow, taxpayers will be able to carry forward unused allowances, up to £50,000 a year, over the past three years, says Steve Woodham, pensions manager at Old Mill. However, to make use of this benefit, they must have been a member of a pension scheme for the equivalent amount of time. Those who have been members for three years can carry forward three years’ unused allowances, while those who are not currently a member of a pension scheme but enrol before 5 April this year will benefit from one year’s carry forward.

"Anyone anticipating making large profits in the next tax year may be wise to ensure they are in a pension scheme before this cut-off date," he says. "Often, farmers leave pension contributions to the more profitable years – but if they are not enrolled in a pension scheme this year they will lose a large proportion of this benefit."

For example, someone who contributes £1,000 to a pension this year will then be able to add the unused £49,000 next year, on top of the annual limit of £50,000. But if they are not in a pension scheme before 5 April, they will only be able to contribute £50,000 next year – and the difference could be worth up to £24,500 off their tax bill.

"Pensions are still a very tax efficient vehicle, and extremely valuable to businesses whose profits fluctuate largely from one year to the next," says Mr Woodham. "Enrolling in a pension scheme can be a relatively straightforward step to preserve your options in the coming years, but time really is of the essence. You should speak to a professional advisor as soon as possible."