What is carry forward
Carry forward was (re)introduced in a new format in 2011/12, it has been possible, subject to conditions, to carry forward unused annual allowance from the three previous tax years to the current tax year. The annual pension allowance is £40,000 per year therefore it’s possible to bring 3 years’ worth of allowance to the current tax year.
Rules required to be eligible to carry forward pension contributions
Carry forward can only be used in the situation where the current years allowance has already been filled.
Unused annual allowance is used up from the earliest year first and worked forwards. All defined contribution (DC) pension and defined benefit (DB) accrual made by the individual into a pension pot must be added together.
Membership to a registered pension scheme is a requirement to use carry forward at some point during the years being carried forward.
There isn’t a requirement for UK earnings to have been received during the tax years being carried forward from.
Any unused annual allowance to carry forward from the previous tax year but one year’s annual allowance has been exceeded (known as an intervening year) within the three year carry forward period, the excess will use up some or all of the unused allowance from the earlier year(s) – but only for overpayments in tax years 2011/12 or later
Non-UK residents can still benefit from carry forward as long as they have been a member of a registered pension scheme at some point during the tax years. Examples would be, opening a personal pension before leaving the UK or if you have a deferred benefit within a final salary scheme.
If you trigger your money purchase annual allowance of £4,000, carry forward becomes invalided in relation to money purchase funding.
Potential situation in 2015/16
During the tax year 2015/16 Pension Input Period (PIP) may not be aligned with the normal financial tax year therefore, seek professional advice before moving ahead with carry forward. Financial year 2019/2020 will eliminate this issue.
The table below outlines the above statement.
Amount of pension funding in PIPs ending in the pre-alignment tax year | Amount of the £80k annual allowance available for use in the post-alignment tax year | Amount of pension funding in the post-alignment tax year | Amount available to carry forward from 2015/16 to future tax years |
£0 | £40,000 | £30,000 | £10,000 |
£20,000 | £40,000 | £40,000 | £0 |
£30,000 | £40,000 | £20,000 | £20,000 |
£40,000 | £40,000 | £0 | £40,000 |
£50,000 | £30,000 | £20,000 | £10,000 |
£60,000 | £20,000 | £5,000 | £15,000 |
£70,000 | £10,000 | £0 | £10,000 |
£80,000 | £0 | £0 | £0 |
What is the tax relief for using carry forward?
Unused annual allowance being carried forward has usual tax relief applied to any contributions made. Tax relief on employer’s contribution is subject to usual wholly and exclusively test and tax relief on personal contribution is limited to 100% of the individual’s earnings for the tax year which contribution is made (£3,600 or higher).
What should you think about?
Carrying forward unused annual allowances can be done automatically and doesn’t require any claims put into HMRC. This would be a viable option if you’ve not used your full £40,000 annual allowance. We would, therefore, recommend that you seek professional advice from your financial planner to ensure you are maximising your pension allowance each year, as far back as three years ago.
Remember that unused relief from 2015/16 must be used by 5th April 2019 or lost forever.