Hands up who remembers the old carry back and carry forward rules?
These days we just have carry forward mark two, which was brought back in its current format in 2011 to 2012.
Carry forward makes it possible, subject to conditions, for unused annual allowances from the three previous tax years to be carried forward to the current tax year to increase the overall annual allowance available.
This can allow money purchase pension contributions and/or defined benefit accrual in excess of the current tax year’s annual allowance to be made in a tax year without incurring an annual allowance tax charge.
It is a very useful facility for those who may have missed out on maximising their pension funding in earlier years.
However, the various changes that have taken place over the past few years, including the transitional year in 2015 to 2016, can make it difficult to pin down exactly how much someone is able to contribute (or accrue, if defined benefit).
Also, we now have the money purchase annual allowance and the tapered annual allowance which can make a big difference to the funding position for those affected by them.
There are strict rules governing how carry forward works:
- It is only possible to use carry forward if the current year's annual allowance has been fully used up – that is, it will have been by the end of the tax year.
- Unused annual allowance can be carried forward to the current tax year from the previous three tax years.
- Unused annual allowance is used up starting with the earliest year first - when calculating how much annual allowance has been used up in a particular tax year it is necessary to add together all DC pension contributions (and DB accrual – not contributions) made by, or on behalf of, the individual in any pension input period (Pip) ending in that tax year. From 2016 to 2017 onwards, all Pips match the tax year and cannot be altered. But in earlier years the Pip did not have to be the same as the tax year and could be altered.
- The person must have been a 'member' of a registered pension scheme at some point during the year being carried forward from. A member includes an active member, a deferred member, a pension credit member or a pensioner member.
- There is no need for any contributions to have been made to the scheme in the year being carried forward from, and the new contributions do not have to be paid into the earlier arrangement.
- There is no need for the individual to have had any relevant UK earnings in the tax years being carried forward from.
- For tax years 2008 to 2009 to 2010 to 2011, the annual allowance was deemed to be £50,000 for carry forward purposes. For tax years 2011 to 2012, to 2013 to 2014 the annual allowance actually was £50,000 and from 2014 to 2015 onwards the standard annual allowance reduced to £40,000 (with transitional provisions applying in 2015 to 2016 - see below).
- Once someone triggers the money purchase annual allowance (possible from April 6 2015 onwards) their money purchase funding is restricted (to £10,000 per annum in 2015 to 2016 and 2016 to 2017 and £4,000 from 2017 to 2018 onwards) and it is no longer possible to use carry forward in relation to money purchase funding. Carry forward and the balance of the full annual allowance remain available in relation to accrual within final salary/defined benefit pension arrangements.
From April 6 2016, the full annual allowance is reduced in any tax year where an individual has adjusted income in excess of £150,000 (and whose threshold income is more than £110,000).
The annual allowance will be reduced by £1 for every £2 of income above £150,000, with a maximum reduction of £30,000, i.e. the annual allowance cannot fall below £10,000.
Carry forward remains available in the usual way, so up to £40,000 can potentially be carried forward from 2015 to 2016, 2016 to 2017 and 2017 to 2018. However, in any tax year in which the individual’s annual allowance has been reduced by application of the taper, only the balance of the tapered annual allowance can be carried forward to future tax years.
Sam has his annual allowance reduced to £15,000 for 2016 to 2017. His total pension funding for the tax year is a single payment of £10,000 gross to his self-invested personal pension.
He has the balance of £5,000 available to carry forward.
Individuals who have been a non-UK resident for a period of time are able to carry forward unused annual allowance from tax years when they were not UK resident, as long as they were a member of a registered pension scheme at some point in the tax year being carried forward from.
To explain, an individual with a personal pension that they started before leaving the UK, or a person leaving the UK who has deferred benefits within a final salary scheme, will be eligible to carry forward their unused allowances from the previous three tax years in the normal way once they return to the UK.
Questions appear on the last page of this article.