FOR FINANCIAL ADVISERS ONLY

FOR FINANCIAL ADVISERS ONLY

Consumer
Share

Carry forward of Annual Allowance

Carry forward relates to unused annual allowance not unused tax relief. If the individual relies on carry forward to make a large personal contribution they must have the earnings in the current tax year to cover it.

Pension scheme funding with relatively low annual allowances may inadvertently catch some individuals who have one-off spikes in pension accrual. For example, an individual may make sizable contributions because in one year they make a large profit or receive a large bonus. A member of an occupational pension scheme may find that they have breached the annual allowance as a consequence of a promotion that results in a pay rise. In recognition of this, in 2011/2012 the Government introduced a three year carry forward rule. This rule allows individuals to make occasional large pension savings without incurring an annual allowance charge, by carrying forward any unused annual allowance from the pension input periods ending in the three previous tax years to the current tax year.

For people who enter flexi-access and take an income from 6 April 2015 onwards they will incur a money purchase annual allowance (MPAA) reduction of £10,000 and will be unable to use carry forward in the future. Knowledge Direct has articles relating to the details on the MPAA.

Key points to note

  • In order to make use of any unused annual allowance the individual must have been a member of a registered pension scheme at some point during the tax year they are carrying forward from. But it is not necessary for the individual to be an active member of the scheme in that year. Nor does the carry forward of unused annual allowance have to be used in the same arrangement in which it originally arose.
  • Annual allowance is used up in a strict order. The annual allowance for the current year is used up first. Then the carry forward of unused annual allowance, using the earliest carry forward year first and so on.
  • If one of the previous three years has an input amount of more than the annual allowance applicable in that year, then that excess is treated as using up any amount of available annual allowance from the preceding three year(s) first and this will reduce the available annual allowance to be carried forward to the current year.
  • For historic carry forward calculations, the position for the tax years 2008/09, 2009/10 and 2010/11 are different. In these years the available annual allowances were much higher. However, for carry forward purposes the amount was restricted to £50,000. If the client had funded more than this in the tax year there would be no carry forward available.
  • Old Mutual Wealth has provided a carry forward calculator and a pro forma table for your convenience. 
  • The annual allowance dropped to £40,000 in April 2014, it should be noted that for tax year 2013/14 (and previously tax years 2011/12, 2012/13) the amounts available for carry forward will still be based on £50,000 with all other standard rules applying accordingly.
  • From tax year 2016/17 all pension input periods will run in tax years as introduced by the Budget on 8 July 2015.
  • For tax year 2015/16 a member will have multiple pension input periods ending in this tax year. Please read the article “PIP changes – July Summer Budget” for more information.
  • When calculating the amount that can be carried forward from tax year 2015/16 this will be determined by calculating the available post alignment (9th July ’15 – 5th April ’16) annual allowance.

Carry forward into tax year 2016/2017 for high earners

From 6th April 2016 new legislation was introduced to reduce down the level of annual allowance for people with adjusted income in excess of £150,000 (please read the article “tapered annual allowance & high earners”). This tapering will only apply to the specific tax year in question and will not prohibit the continued use of the unused carry forward amounts from previous tax years.

The effect of the Money Purchase Annual Allowance

If any client has triggered a Money Purchase Annual Allowance they will have a future annual allowance relating to money purchase schemes fixed at £10,000. Unlike the tapering annual allowance this does not allow for previous year’s annual allowances to be carried forward via money purchase arrangements.

For financial advisers only. Not to be relied on by consumers.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth or Old Mutual International's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

See our Legal and Regulatory details. 

Financial Adviser Verification

The content of this site is for advisers only. It is not for the use of Hong Kong advisers. You can change the regional content by selecting a region from the drop down box in the top right-hand corner.