Carry Forward

A look at how carry forward of unused allowances operates.

Key Points

The Annual Allowance is currently set at £40,000 for 2019/20 tax year.

It is possible to carry forward unused allowances from the previous three tax years. The furthest back of the three years must be used first.

The individual must have been a member of a pension scheme in those tax years the unused allowance is carried forward from.

For personal contributions, it is important the individual has UK relevant earnings in the tax year the contribution is made sufficient to cover the size of the contribution.


What is carry forward?

Carry forward allows an individual to bring forward any unused annual allowance from the previous three tax years. Contributions can then be larger than the annual allowance in the current tax year.

INDIVIDUALS MUST:

  • Have used up their annual allowance for the current tax year.
  • Have been a member of a UK registered pension scheme over any of those previous three tax years they wish to use carry forward from.
  • Have unused annual allowance to carry forward from those tax years.
  • Have sufficient UK relevant earnings to cover the size of the proposed contribution in the tax year that the contribution is made (if made as a personal contribution).

How is carry forward worked out ?

step 1

WORK OUT HOW MUCH UNUSED ALLOWANCE IS AVAILABLE FROM THE PREVIOUS THREE TAX YEARS

  • Determine the level of pension contributions for each pension plan for the three tax years, known as the pension input amount.
  • This should include all Defined Contribution (DC) and Defined Benefit (DB) schemes for the tax year in question.
  • Then deduct this from the remaining annual allowance available in those tax years.

Step 2

ADD THIS TO THE ANNUAL ALLOWANCE IN THE TAX YEAR THE PROPOSED CONTRIBUTION IS TO BE MADE

  • Determine whether the annual allowance or the tapered annual allowance applies
  • If the Money Purchase Annual Allowance (MPAA) applies then carry forward cannot be used to increase a DC contribution beyond the £4,000 limit (for 2017/18 tax years onwards)
  • Then calculate how much annual allowance is available – this will be a combination of the annual allowance for the tax year in question plus any unused annual allowance that can be carried forward from the previous three tax years

Step 3

PROVIDING THE CONTRIBUTION IS OVER THE £40,000 ANNUAL ALLOWANCE, AND THE CRITERIA IS MET, CARRY FORWARD CAN BE USED.

  • The contribution can be made personally (providing the individual has the relevant earnings to cover the size of the contribution being made); or
  • The employer can make the contribution regardless of the individual’s earnings (subject to the ‘wholly and exclusively’ rules); or
  • A combination of the two.
  • Providing it is within the available annual allowance limit (including any unused carry forward), then an annual allowance charge will not apply.
  • Individuals do not need to make an election to use carry forward but should probably keep a record in case HMRC require evidence to support tax returns.

Example - John

  • Has earnings of £80,000
  • He wants to make a pension contribution of £70,000 into his pension
  • He would like to know what scope there is to make the desired contribution.

SO WHERE DOES JOHN START?

The first task is to look back over the previous three tax years.

We can see that John used up £30,000 of his annual allowance in the previous three tax years and so has £10,000
unused allowance from each, giving a total of £30,000 available to carry forward.

As John’s total earnings are £80,000 and the contribution is £70,000 his UK relevant earnings are sufficient and he
has enough available unused allowance therefore he will avoid an annual allowance charge.


1. He looks back to the furthest of the three tax years first (16/17)
2. He then uses up any unused allowance from (17/18)
3. Finally he uses up any unused allowance from (18/19)


The transitional PIP – 20I5/I6 tax year

THE TRANSITIONAL RULES (RECAP):

  • All pension input periods (PIPs) open on 8 July 2015 ended on 8 July 2015
  • The next PIP will have opened between 9 July 2015 – 5 April 2016
  • All existing arrangements on 8 July 2015 may have had one or two PIPs ending on that date. With the option to open
    another PIP from 9 July 2015 this could result in up to three PIPs ending within the tax year 2015/16
  • For arrangements started on/after 9 July 2015, the first PIP will start at their commencement date and end on 5 April 2016
  • Since 6 April 2016, all PIPs have been aligned with the tax year (i.e. 6 April – 5 April)

ANNUAL ALLOWANCE TRANSITIONAL RULES
DC SCHEMES:

Split into two mini tax years:

  • Pre-alignment tax year
    - PIPs ending between 6 April 2015 – 8 July 2015
    - Annual allowance £80,000
  • Post-alignment tax year
    - PIP ending between 9 July 2015 – 5 April 2016
    - Annual allowance £0
    - Can carry forward up to £40,000 unused allowance
    from pre-alignment tax year
  • Two mini tax years treated as one tax year for carry forward purposes (where value based on the
    pre-alignment figure of up to £80,000, where only
    £40,000 can be carried forward into future years).

DB SCHEMES:

The Pension Input Amount (PIA) is calculated by determining the increase in the value of the member’s benefit over the PIP.

The combined period:

  • Is the increase in a member’s pension benefit over both the pre-alignment and post-alignment tax years; and
  • Proportioning this combined input between the two periods

Post-alignment:

  • This will be the same for all schemes – 9 July 2015 – 5 April 2016

Pre-alignment:

  • This will vary depending on the schemes dates

Planning considerations

PENSION TAX PLANNING CAN HELP CLIENTS:

  • Maximise contributions where possible
  • Make use of unused annual allowance using carry forward
  • Wanting to use any redundancy payment (above the £30,000 threshold) as a pension contribution using carry forward when any unused allowance is available.

PENSION TAX PLANNING CAN HELP CLIENTS:

  • Reclaim all or part of their personal allowance
  • Reduce or eliminate the high income child benefit tax charge
  • Reduce the amount of Capital Gains Tax (CGT) payable on a taxable gain
  • Reduce all or part of any higher rate tax on encashment of an investment bond

This briefing note is also available as a PDF

This document is based on Canada Life’s understanding of applicable UK tax legislation and current HM Revenue & Custom’s practice, as at March 2019 and could be subject to change in the future. It is provided for professional advisers only. Any recommendations are the adviser’s sole responsibility.

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