Pension annual allowance (AA) is the annual limit on the amount of contributions paid to, or benefits accrued in, a pension scheme before you have to pay tax.
Carry forward is a potential way of increasing your annual allowance in the tax year and is used when your total pension input amounts for a tax year exceed their annual allowance limit for that year.
Carry Forward - The Basics
Carry forward allows you to utilise unused annual allowances from the previous three tax years. You must first use the current tax year fully and then use the oldest tax year next and so on.
The important thing to be sure of is that you have enough, not necessarily to get too hung up on which year it is used from at this point in time. Exceeding the annual allowance including carry forward will mean tax charges, designed to recoup tax relief given. The tax charge is payable by you as the member, even if contributions have been paid entirely by your employer.
If total contributions do not exceed the annual allowance including carry forward then there is no need to declare this on a tax return, only contributions in excess of this need to be declared in the pension tax charge section of self assessment.
However, for those contributing to a relief at source pension scheme, who are higher or additional rate tax payers, you will need to ensure you claim any extra tax relief due. This should be done even if you exceed the annual allowance so as not to be unfairly penalised.
Eligibility
We have to remember that not everyone is eligible for carry forward, you must have been a member of a scheme in the years in which you are carrying forward unused annual allowance.
This doesn’t just mean a contributing member, but also anyone with a deferred pension scheme, such as an old final salary pension or even a contracted out rebate scheme for instance.
But if this is your first pension contribution ever, then carry forward isn’t available. In addition, if you are subject to the money purchase annual allowance then carry forward is only available in relation to defined benefit accrual.
Limitations
The annual allowance is a test on total pension contributions including personal tax relief received by the scheme and employer contributions, and therefore when carrying forward the annual allowance from the previous three years it increases the total amount of pension contributions that can be paid within the current tax year.
What it doesn’t do is bring forward unused tax relief, so for personal contributions there is a limit on the amount of tax relief available equal to £3,600 or 100% of relevant UK earnings within the current tax year. This means that for many you will have significantly more available annual allowance than you can pay with personal contributions alone.
It is important to remember in addition that carry forward isn’t limited by your earnings in previous years, so if you had earnings of £20,000 and paid a £10,000 gross personal contributions with no employer contributions then £30,000 carry forward would be available. Of course you wont be able to claim more tax relief than your income in the year of payment.
Tapered annual allowance
Pension savings statements or contribution histories provided by schemes will not take into account the tapered annual allowance. Schemes are not responsible for this calculation because they do not have sufficient information to do the calculations.
Therefore, it is important to fully understand your income position, including in previous years. If the tapered annual allowance applied in previous years, it is this figure that will be used in the carry forward calculations, not the standard annual allowance.
Claiming Carry Forward
As I said above, there is no requirement to claim carry forward or make an election to use carry forward. However, it is prudent to keep a record of when carry forward is being used in case HMRC require evidence to support tax returns.
Key Points
Annual allowance rules operate separately from the tax relief rules. You need to consider both when looking at pensions saving
Carry forward relates only to unused annual allowance (not tax relief from earlier tax years) and does not need to be ‘claimed’
Carry forward is only used where pension input amounts exceed the standard AA or individual’s tapered AA limits for the relevant tax year
Pension Input Periods prior to 6 April 2016 did not have to be aligned with the tax year, and did not change retrospectively
To uncover unused AA for carry forward, you should go back 3 years (but not beyond the date of first joining a pension scheme) from any AA excess year
There are calculators available online, however knowing what amounts to put where is crucial for getting the correct results. Garbage In equals Garbage Out. If in doubt, ASK.
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