Pensions carry forward – a quick guide

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The standard annual allowance is currently £60,000 a year. Carry forward allows individuals to carry forward any unused allowances from the three previous tax years and add these to the allowance for the current tax year. This means that, potentially, up to £180,000 could be payable in the current tax year without breaching the annual allowance (£60,000 for 2023/24 plus £40,000 for each of the three tax years 2020/21, 2021/22 and 2022/23).

To be eligible for carry forward the individual must have been a member of a registered UK pension scheme in the tax year(s) they wish to carry forward from. There is no requirement to have made any contributions in those years and deferred or pensioner membership provides eligibility.

The annual allowance for the current tax year must be used first and then carry forward relief is used in chronological order with the earliest year first.

Example

Sam has paid the following contributions and wants to know the maximum additional contribution they could make in the current tax year:

Sam has £20,000 of annual allowance still available for the current tax year. They can then add the £16,000 available from 2019/20 and the £20,000 from 2020/21 to give a total maximum additional contribution of £56,000.

YearAnnual allowanceContributionsCarry forward
2020/21£40,000£24,000£16,000
2021/22£40,000£20,000£20,000
2022/23£40,000£40,000 £0
2023/24£60,000£40,000

Sam has £20,000 of annual allowance still available for the current tax year. They can then add the £16,000 available from 2020/21 and the £20,000 from 2021/22 to give a total maximum additional contribution of £56,000.

If Sam doesn’t pay more than a further £20,000 in the current tax year (i.e. £60,000 in total) the £16,000 available from 2020/21 will be lost.

Note that, if they are making personal contributions, they would need relevant UK earnings of at least the total contribution amount, i.e. £96,000 in the current tax year, to be eligible for tax relief on the full contributions. It is not possible to carry forward unused earnings, only the unused annual allowances.

Where the individual exceeds the annual allowance in one of the two previous tax years then you need to look back further to determine if any excess can be offset against earlier years. For example, if the contribution in 2022/23 had been £50,000, rather than £40,000, the contributions for 2019/20 would need to be checked to see if the £10,000 excess could be offset with any carry forward available from that year.

Where an individual is a high earner and is, or has been, subject to tapering, their tapered annual allowance will need to be calculated for each of the relevant tax years. The current limits are £200,000 Threshold Income and £260,000 Adjusted Income. Adjusted Income was £240,000 from tax years 2020/21 to 2022/23, so the annual allowance and any carry forward for those earlier years will be based on this lower income limit. (Threshold Income was £200,000 from tax years 2020/21 to 2022/23.)

The annual allowance and any carry forward for tax years prior to 2020/21, will be based on Threshold Income of £110,000 and Adjusted Income of £150,000.

Where an individual has triggered the Money Purchase Annual Allowance, their annual allowance for money purchase (defined contribution) pension contributions reduces to £10,000 a year and no carry forward is available. However, carry forward is still available in respect of accrual to a defined benefit (final salary) pension scheme.

If you would like to discuss the above in more detail, please contact us here.

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Sources: Techlink

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