Carry forward relates to unused annual allowance not unused tax relief. If the individual relies on carry forward to make a large personal contribution, they must have the earnings in the current tax year to cover it.
Pension scheme funding with relatively low annual allowances may inadvertently catch some individuals who have one-off spikes in pension accrual. For example, an individual may make sizable contributions because in one year they make a large profit or receive a large bonus. A member of an occupational pension scheme may find that they have breached the annual allowance because of a promotion that results in a pay rise. In recognition of this, in 2011/2012 the Government introduced a three year carry forward rule. This rule allows individuals to make occasional large pension savings without incurring an annual allowance charge, by carrying forward any unused annual allowance from the pension input periods ending in the three previous tax years to the current tax year.
For people who enter flexi-access and take an income from 6 April 2015 onwards they will incur a money purchase annual allowance (MPAA) reduction and will be unable to use carry forward in the future. The MPAA was originally set at £10,000, reduced to £4,000 from April 2017 and then increased back to £10,000 from April 2023.
Key points to note
- To make use of any unused annual allowance the individual must have been a member of a registered pension scheme at some point during the tax year they are carrying forward from. But it is not necessary for the individual to be an active member of the scheme in that year, they can be an active, deferred or even pensioner member.
- Carry forward of unused annual allowance does not have to be used in the same arrangement in which it originally arose.
- Annual allowance is used up in a strict order. The annual allowance for the current year is used up first. Then the carry forward of unused annual allowance, using the earliest carry forward year first and so on.
- If one of the previous three years has an input amount of more than the annual allowance applicable in that year, then that excess is treated as using up any amount of available annual allowance from the preceding three year(s) first and this will reduce the available annual allowance to be carried forward to the current year.
- For historic carry forward calculations, the position for the tax years 2008/09, 2009/10 and 2010/11 are different. In these years the available annual allowances were much higher. However, for carry forward purposes the amount was restricted to £50,000. If the client had funded more than this in the tax year, there would be no carry forward available.
- Quilter has provided a pro forma table for your convenience.
- The annual allowance for each tax year should be applied for carry forward. This means that for tax years 2011/12 - 2013/14 this amount will be £50,000, for tax years 2014/15 -2022/23 this amount will be £40,000 and from April 2023 this will be £60,000.
- From tax year 2016/17 all pension input periods run in tax years as introduced by the Budget on 8 July 2015.
- For tax year 2015/16 a member could have multiple pension input periods ending in this tax year.
- When calculating the amount that can be carried forward from tax year 2015/16 this will be determined by calculating the available post alignment (9th July ’15 – 5th April ’16) annual allowance.
Carry forward into tax year 2016/2017 for high earners
From 6th April 2016 new legislation was introduced to reduce the level of annual allowance for people with adjusted income in excess of £150,000. For more details, read the “tapered annual allowance & high earners” article. This tapering will only apply to the specific tax year in question and will not prohibit the continued use of the unused carry forward amounts from previous tax years. This adjusted income level was increased to £240,000 in tax year 2020/21 and increased again in tax year 2023/24 to £260,000.
The effect of the Money Purchase Annual Allowance
If any client has triggered a Money Purchase Annual Allowance, they will have a future annual allowance relating to money purchase schemes fixed at £10,000. Unlike the tapering annual allowance this does not allow for previous year’s annual allowances to be carried forward via money purchase arrangements.
For financial advisers only. Not to be relied on by consumers.