These FAQs are for financial advisers only. They mustn’t be distributed to, or relied on by, customers. They are based on our understanding of legislation at the date of publication.Thu Sep 20 09:39:00 BST 2018 Back to results
Carry forward can allow additional contributions to be made which exceed the standard annual allowance in that tax year. This might be attractive to individuals who have received a large salary increase, whose profits have been good in a self-employed business, who have been made redundant or are approaching retirement.
To be able to carry forward unused annual allowance from a previous tax year, an individual must have been a member of a registered pension scheme at some point in that tax year (a ‘member’ includes active, deferred and pensioner members). This can apply even if no contributions were made during that year or if there was a nil pension input amount. Carry forward cannot be used for any year that an individual was not a member of a registered pension scheme. Any contribution made using carry forward does not need to be made to the same registered pension scheme that an individual was a member of in the previous year.
If personal contributions are being made using carry forward, then these need to be within 100% of an individual’s relevant UK earnings for tax relief purposes. Employer contributions are subject to HM Revenue and Customs (HMRC) ‘wholly and exclusively’ rules for corporation tax relief purposes.
Carry forward works by using up the annual allowance in the current tax year first. It’s then possible to make use of any unused annual allowance from the previous three tax years, with the earliest of the three tax years being used first.
In calculating the amount of annual allowance used up for the current and previous three tax years, it’s necessary to know the ‘total pension input amount’ for the ‘pension input period’ ending in each tax year. Both of these terms are covered in our separate 'Annual allowance' and 'Pension input periods' FAQs.
Here are some more carry forward rules to be aware of:
- The annual allowance for the 2015/16 tax year is split into two mini tax years, with mini tax year one (which ended on 8 July 2015) having an annual allowance of £80,000 and mini tax year two (which runs from 9 July 2015 to 5 April 2016) having an annual allowance of nil. Up to £40,000 of unused allowance from mini tax year one can, however, be carried forward into mini tax year two. Any unused annual allowance from mini tax year two can be carried forward as normal. You can find more information on this in our Pension input periods FAQs. Note – the money purchase annual allowance (MPAA) could apply in the 2015/16 tax year or a later tax year.
- The standard annual allowance for the 2016/17 and 2017/18 tax year is £40,000 although the MPAA and/or the tapered annual allowance (TAA) could apply in these tax year.
- If one of the previous two tax years has a pension input amount of more than the annual allowance, the amount of any excess will reduce the unused annual allowance from an earlier year (up to nil).
The table below lists the pension input amounts for five different scenarios and shows how much annual allowance can be carried forward into the 2018/19 tax year, assuming that carry forward (CF) was available in each tax year and that neither a money purchase annual allowance nor a tapered annual allowance applies (see below for more information on each of these):
|2015/16 mini tax year 1 (MTY1)||2015/16 mini tax year 2 (MTY2)||2016/17||2017/18||Total carry forward||Maximum pension input amount in 2018/19|
|1||£15,000 (£40,000 CF to MTY2 only)||£15,000 (£25,000 CF)||£30,000 (£10,000 CF)||£20,000 (£20,000 CF)||£55,000||£95,000|
|2||£40,000 (£40,000 CF to MTY2 only)||£10,000 (£30,000 CF)||£20,000 (£20,000 CF)||£40,000 (£0 CF)||£50,000||£90,000|
|3||£28,000 (£40,000 CF to MTY2 Only)||£40,000 (0 CF)||£0 (£40,000 CF)||£40,000 (£0 CF)||£40,000||£80,000|
|4||£5,000 (£40,000 CF to MTY2 Only)||£20,000 (£20,000 CF)||£15,000 (£25,000 CF)||£25,000 (£15,000 CF)||£60,000||£100,000|
|5||£45,000 (£35,000 CF to MTY2 only)||£35,000 (£0 CF)||£32,000 (£8,000 CF)||£38,000 (£2,000 CF)||£10,000||£50,000|
The examples are based on an annual allowance of £80,000 for mini tax year 1 in 2015/16. Up to £40,000 of unused annual allowance can be carried forward from mini tax year 1 into mini tax year 2 for 2015/16. The standard annual allowances for 2016/17, 2017/18, and 2018/19 are £40,000.
How does carry forward work with the money purchase annual allowance?(Expand content) (Minimise content)
Since 6 April 2015, a reduced annual allowance has applied to money purchase pension contributions for anyone who flexibly accesses their pension benefits. HMRC introduced the money purchase annual allowance (MPAA) to ensure there are no potential recycling issues with individuals claiming further tax relief on new contributions made, having just taken their pension benefits under the pension flexibility rules.
The MPAA only applies to money purchase contributions rather than to all pension contributions being made. So it will still be possible for an individual to accrue benefits in a defined benefits (final salary) scheme up to the current overall annual allowance of £40,000, but taking into account any money purchase contributions counted against the MPAA. If the money purchase contributions exceed the MPAA then an alternative annual allowance (plus any carry forward) will apply to any defined benefits accrual.
It’s not possible to use carry forward in conjunction with the MPAA limit. Any unused annual allowance from the previous three pension input periods can’t be carried forward to allow for a higher money purchase contribution in the current pension input period. The unused allowance could, however, be used to cover a large benefit accrual in a defined benefits scheme. You can find out more about the MPAA in our separate Money Purchase Annual Allowance FAQs.
Since 6 April 2016 there has been a reduced annual allowance for those with an ‘adjusted income’ of over £150,000. The reduction works through the operation of a £1 reduction in the annual allowance for every £2 of adjusted income above £150,000. So, those with an adjusted income of £210,000 or more in a tax year will have a £10,000 annual allowance for that tax year.
However, if an individual’s ‘threshold income’ is no more than £110,000 they will not normally be subject to the tapered annual allowance. You can find out more about how tapering works in our Tapered Annual Allowance FAQs.
It is possible to use carry forward where the tapered annual allowance applies in the current tax year.
Where the annual allowance has been reduced in a carry forward year as a result of the taper provisions, then the carry forward available will be based on the tapered annual allowance amount. For example, if 2017/18 is a carry forward year and £7,000 of contributions were made when a £10,000 tapered annual allowance applied, then there will be £3,000 of unused annual allowance to carry forward. Here are two examples to demonstrate how this will work:
|PIP ending in tax year||Annual allowance||Tapered annual allowance||Pension input amount||Amount available for carry forward (CF)|
|2015/16 (MTY1)||£80,000||n/a||£25,000||£40,000 to MTY2 only|
|2015/16 (MTY2)||Nil, but up to £40,000 can be carried forward from MTY1||n/a||£25,000||£15,000|
Maximum pension input amount in 2016/17 would be £32,000 (£17,000 + £15,000 CF), so there is £12,000 available to CF.
Maximum pension input amount in 2017/18 would be £27,000 (£15,000 + £12,000 CF) so there is £7,000 available to CF.
Maximum pension input amount in 2018/19 would be £22,000 (£15,000 + £7,000 CF) so there is £2,000 available to CF.
|Tax year||Tapered annual allowance||Pension input amount||Amount available for carry forward|
Can carry forward £5,000 from 2017/18, so maximum pension input amount would be £15,000
It’s possible to carry forward any unused annual allowance automatically. There’s no requirement to make a claim to HMRC to carry forward any unused allowance and there’s no need for the details to be included on a self-assessment tax return if there’s no annual allowance charge due.
Pensions Technical have produced a set of carry forward worked examples, which you can find here.
You can find HMRC’s guidance on carry forward here(Opens new window).
HMRC have an annual allowance calculator, which you can access here. Take care when entering information into the calculator and make sure you fully understand the output before taking any action on it.
Pensions Technical Services