Carry forward is a pension contribution tax rule. It allows you to pay pension contributions in excess of the standard annual allowance for the current tax year.
Here are 5 Key Points
- The standard Annual Allowance (i.e. maximum pension contribution) for the current tax year (2020/21) is £40,000.
- You have to have an existing pension that you’ve contributed to even if you are no longer paying into it.
- For personal contributions your earned income must be at least equivalent to the contribution (to get full tax relief).
- You can use carry forward for employer/company pension contributions (particularly useful if you’re a controlling director with a profitable business).
- You can’t use carry forward if you’ve taken pension benefits since 2015 (there are some exceptions).
When is Carry Forward Useful?
- If you’re a business owner and want to pay more than £40,000 into your pension fund in the current tax year.
- When you’re earning more than £40,000 in the current tax year and want to pay a larger personal pension contribution.
- For a higher rate tax payer, who wants to take advantage of tax savings (before they disappear).
Remember: you must use any unused relief from 2017/18 by 5 April 2021 or lose it forever.
TIP: If you don’t have already have a pension plan…
Consider setting up a pension plan with a small contribution in this tax year. Then, if you don’t have the funds available to use your full annual allowance, you can carry forward to when you (or your company) might have more money available. Otherwise you’ll lose this year’s allowance.
Keep Reading if you Want to go Deeper…
There are strict rules governing how carry forward works and it’s important you stay within them to avoid any nasty tax charges.
How does it Work?
You can carry any unused annual allowance forward to the current tax year from the previous three tax years. But you have to use up your current year’s annual allowance first.
You start by using any unused annual allowance from the earliest year.
You have to 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.
You don’t have to have to have made any contributions to the scheme in the year being carried forward from. Also, the new contributions don’t have to be paid into the earlier arrangement.
You don’t need to have had any relevant UK earnings in the tax years being carried forward from.
Can you still use Carry Forward if you’ve taken Benefits?
If you’ve taken pension benefits from 6 April 2015 onwards you could have triggered the money purchase annual allowance.
This restricts your pension contributions to £4,000 in the current tax year (£10,000 pa in 2015/16 and 2016/17 to £4,000 from 2017/18 onwards).
It also means you can’t use carry forward in relation to money purchase funding (ie personal pension plans).
Carry forward and the balance of the full annual allowance remain available in relation to accrual within final salary/defined benefit company pension arrangements.
What happens if you’re on a Higher Income?
For the current tax year 2020/21 onwards, the full annual allowance is reduced in any tax year you have adjusted income over £240,000 (and whose threshold income is over £200,000).
This is known as the tapered annual allowance.
The maximum reduction is £36,000, i.e. the annual allowance can’t fall below £4,000.
This means you can only carry forward the balance of the tapered annual allowance to future tax years.
For tax years 2016/17 to 2019/20, the tapered annual allowance applied to a lower adjusted income of over £150,000 (and threshold income is over £110,000).
The maximum reduction is £30,000, i.e. the annual allowance can’t fall below £10,000.
Note: as you can probably tell, Tapered Annual Allowance is complex and has a whole article of it’s very own (see link below)
Don’t get Caught out by the tricky 2015 – 2016 rules!
You might think this is too far back to be relevant. Unused annual allowance from the 2015/16 tax year can’t be carried forward to 2020/21.
That’s true, however it can still be relevant when assessing what carry forward is available in 2020/21. Particularly if you exceeded the annual allowance between 2015/16 and 2019/20.
If you think this might be possible, we recommend you seek advice from your accountant or a pensions expert.
Carry Forward and Tax Relief
If you’re carrying forward your unused annual allowance, the usual tax relief rules still apply to any contributions made.
Tax relief on company/employer contributions is subject to the usual ‘wholly and exclusively test’.
Tax relief on your personal contributions is limited to 100% of your relevant UK earnings for the tax year in which the contributions are actually paid (or £3,600 if greater).
Remember you’re carrying forward your unused annual allowance – not unused earnings from earlier years.
Do I have to tell HMRC?
You don’t have to make a claim to HMRC to carry forward any unused Annual Allowance.
As long as you haven’t incurred an annual allowance tax charge, the carry forward details do not need to be shown on your tax return.
We recommend you keep clear records in case your pension savings exceed the annual allowance in a subsequent year.
You will also want to show details of personal contributions made to a personal pension if you’re claiming higher/additional rate tax relief.