Partner Content by Royal London

Carry forward – where do people go wrong?

Fiona Hanrahan, Intermediary Development and Technical Manager at Royal London outlines the mistakes to avoid when using carry forward this tax year end.

In the run up to tax year end your clients will likely be looking to make use of their 2022/23 allowances and reliefs if they haven’t already. If they’re looking to pay the maximum into their pension without a tax charge applying, then it will likely be necessary to work out their unused annual allowance using carry forward.

When using carry forward, it is important to be accurate as the consequences of getting the calculation wrong can mean an annual allowance tax charge for the client or even contributions needing to be refunded.

Over the years at Royal London our technical team has checked many hundreds of carry forward calculations so they have a very good idea of where the main mistakes are made.  We thought we’d share these with you so that you don’t do the same.

Where do people go wrong?

The main mistakes people make when working out unused annual allowance are:

1. Getting mixed up between annual allowance and tax relief

When you’re using carry forward, you’re working out the unused annual allowance not unused tax relief.  So, it’s important to remember that for an individual contribution, the client will still need earnings in the year of payment to support the contribution.  For example, if there is £100,000 worth of unused annual allowance, the client will need earnings of at least this in order to make an individual contribution of this level and receive tax relief.

2. Forgetting about the money purchase annual allowance (MPAA) or tapered annual allowance

Both of these have an impact on how much annual allowance is available.  If the client has triggered the MPAA, then it’s not possible to use carry forward to increase contributions to defined contribution schemes above £4,000 without an annual allowance tax charge applying.  Carry forward will still though be available for any defined benefit (DB) schemes.

The tapered annual allowance rules apply from tax year 2016/17 onwards.  So in theory could apply to all 4 tax years in the carry forward calculation.  If the taper does apply, carry forward can still be used and the standard annual allowance of £40,000 is simply substituted by the tapered annual allowance for each year it applies. Remember that the taper parameters changed with effect from 6 April 2020, so you could be using 2 different methods of calculating the reduction due to the taper.

3. Don’t handle employer contributions correctly

Employer contributions as well as individual and 3rd party contributions count towards the annual allowance.  So, these should be included when working out unused annual allowance.

4. Don’t handle a previous carry forward correctly

When using carry forward, you maximise the current year first before going back to your earliest year and work forwards.  So, if an earlier year includes a contribution of more than the annual allowance for that year you therefore know there will be no annual allowance remaining from that year to carry forward to the current year.