What are the Pension Carry Forward Rules?

03/05/2018

The pension carry forward rules allow you to make use of unused annual allowance from previous tax years. That’s potentially great news for your pension pot. Here’s a quick guide to the ins and outs of the pension carry forward rules. Remember that tax rules can change and that the value of any tax benefits are based on your unique circumstances.

What is carry forward?

It goes without saying that you want to make full use of the tax relief you receive on your pension contributions. The pension carry forward rules help by allowing you to make use of unused allowances from up to three previous tax years.
First you must use up your annual allowance (see the next section for a description of what this means) for the current tax year. You can then jump back three years and work progressively forwards to claim unused tax relief – effectively boosting your annual allowance for the current tax year.
To put it another way: unused annual allowances are available to use retrospectively for three tax years.

What is annual allowance?

Annual allowance refers to the maximum pension contribution you can make in a given tax year. Since 2014/2015 that value has been set at £40,000. If in a given tax year you are set to exceed that contribution and have unused allowances from previous tax years, carry forward allows you to file your contributions against the previous years’ unused allowance – up to a maximum of £120,000.

Sounds good…

It is good. The pension carry forward rules mean unused tax relief from previous years doesn’t go to waste. It’s particularly useful if you have a year of bumper earnings, inherit a lump sum, or if you’re a self-employed sole trader and your earnings fluctuate significantly from year to year. If you choose to make use of the pension carry forward rules there’s no need to notify HMRC but it’s always wise to keep a note of your tax calculations.

How much can you carry forward?

The amount you can carry forward will vary based on how much unused annual allowance you have from the three previous tax years. While calculating your annual allowance, you must include:

  • your own pension contributions
  • pension contributions made by your employer
  • the value of any benefits accrued in a defined benefit scheme

It’s also important to note that in any tax year your total pension contribution cannot exceed your total income for that year. For example, you cannot contribute £90,000 to your pension in a single tax year unless your total earnings are £90,000 or above – no matter how much unused annual allowance you have available to carry forward.
Let’s look at some hypothetical numbers.

TAX YEAR 2015/2016 2016/2017 2017/2018 2018/2019
ANNUAL ALLOWANCE £40,000 £40,000 £40,000 £40,000
TOTAL CONTRIBUTION £10,000* £20,000 £25,000 £2,000
REMAINING ANNUAL ALLOWANCE £30,000 £20,000 £15,000 £38,000

* For the 2015/2016 tax year, only calculate contributions made between 9th July 2015 and 5th April 2016
This provides a total remaining annual allowance of £103,000. That means our hypothetical taxpayer can pay up to £103,000 into their pension in the 2018/2019 tax year and still claim tax relief – as long as their earnings for that year are £103,000 or above.
Note that if you are a higher earner, your annual allowance may be reduced. If the value of your total taxable income together with employer pension contributions exceeds £150,000 in a single tax year, your annual allowance may be ‘tapered’. Talk to us and we can advise you.

Who’s eligible?

You can make use of the pension carry forward rules as long as:

  • you’re an active pension scheme member currently building up pension benefits
  • you’ve had a pension in each of the years from which you’re carrying forward
  • you’re a deferred pension member with paid-up pension benefits
  • you’re a pensioner member, in receipt of pension benefits from your pension scheme, or a pension credit member, where you have a share of your ex-partner’s pension scheme

Deadlines

The annual allowance thresholds run in line with the tax year. That means the deadline to make use of unused allowance from the 2015/2016 tax year is 5th April 2019. If you make your pension contributions by cheque, allow sufficient time for the cheque to clear.

Need some advice?

The pension carry forward rules allow you to maximise the available tax relief on your pension contributions. If you would like some advice, please get in touch by calling us on 01392 432431. Thanks to our wealth of experience and Chartered Financial Planners status, we have helped thousands of clients make smart decisions about their retirement wealth. We can do the same for you.
Nothing in this article constitutes, or is intended to constitute, financial advice. You should always seek advice from a professional financial adviser who is familiar with this type of arrangement to ensure any recommendations made are suitable to your needs and circumstances. The information contained in this article is based upon our current understanding of taxation and regulations as at April 2018. The FCA does not regulate tax advice.

James Priday

This article was written by James Priday

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