Hi, I’m Neil Dickey. Welcome to the FundsNetwork pension technical video on carry forward.
If the annual allowance for a tax year has been fully used it is possible to make use of any unused annual allowance from the previous three tax years – a process known as carry forward.
Just to be crystal clear at outset, carry forward can only be used when the annual allowance has been exceeded and cannot be used to deal with any excess over the money purchase annual allowance, where the only option is simply to pay the tax charge on the excess.
To be eligible to do this, the individual must have been a member of a registered pension scheme in the tax years they are seeking to carry forward unused annual allowance from. They do not have to have been a member for the entire tax year in question, nor do they have to have been an active member making contributions or building up years of service, or even a member of the scheme into which they now plan to contribute.
There is also no requirement for an election to be made to Her Majesty’s Revenue and Customs with carry forward being available automatically where eligible. It’s worth noting that carry forward will increase the limit before an annual allowance charge is incurred, but it will not increase the limit as to how much can be paid in by an individual or their friends and their family that will be granted tax relief. This is still determined by the individual’s relevant UK earnings in the current tax year.
When carrying forward we always make use of the earliest of the three carry forward years first and then work forward. Where the carry forward was in respect of the 2008/09. 2009/10 and 2010/11 tax years the annual allowance was between £235,000 and £255,000 depending on the year and so, a notional annual allowance of £50,000 was used for the purposes of carry forward.
Where the notional figure was exceeded the only consequence for the purposes of carry forward was that no unused annual allowance would be available to carry forward from that particular year.
So in 2011/12 when the annual allowance actually was £50,000 the amount carried forward into 2011/12 would simply have been the sum of any unused annual allowances carried forward from each of the preceding three tax years.
The carry forward rules operate differently from 2011/12 onwards and for these years it is possible to carry forward unused annual allowance of up to £50,000 for 2011/12, 2012/13 and 2013/14 and of up to £40,000 for 2014/15 onwards, with these figures being the actual annual allowances in place in each of these years.
So even though the annual allowance reduced to £40,000 in 2014/15 it is still possible to carry forward up to £50,000 from the earlier years.
Where the annual allowance for any of these years was exceeded then a carry forward exercise would have been carried out at that time to try and absorb the excess over the annual allowance for that year.
Where this was not possible, in other words when an excess remained then the annual allowance charge would have had to be paid and for the purposes of carry forward there would have been no unused annual allowance available to carry forward at that point.
This means that advisers may need to go back and do a carry forward exercise for an earlier year while carrying out the carry forward calculation for the current tax year. This can make the calculation rather complicated particularly where the previous years in question were prior to 2011/12 where a different set of rules apply.
Special rules apply for the 2015/16 tax year as a result of it having been split into two mini-tax years. For the tax year that started on the 9 July 2015 and ends on the 5 April 2016 known as the post-alignment mini-tax year it is possible to carry forward and use any unused annual allowance from 2012/13, 2013/14 and 2014/15 that haven’t already been used up in the pre-alignment mini tax year that ran from 6 April 2015 (or earlier if the plan did not have a tax-year pension input period) to 8 July 2015. Where plans had a pension input period that ended between 7 April 2015 and 8 July 2015, there may be two pension input periods to consider.
In 2016/17, 2017/18 and 2018/19 for the purposes of carry forward we will need to establish the unused annual allowance from 2015/16 as this will be one of the three previous carry forward years.
This is done by establishing what the annual allowance is for the post-alignment mini tax year. Specific care needs to be taken not to simply take the total paid in 2015/18 from £80,000. It is calculated as £80,000 less contributions in the pre-alignment mini tax year or £40,000, whichever is the lower figure, with any pension input amount in the post-alignment mini-tax year then deducted. The resulting figure is the unused annual allowance available to carry forward from 2015/16 into 2016/17, 2017/18 and 2018/19.
Particular care must be taken where a member has exceeded the annual (or tapered) allowance in a previous year as the excess in that year may have been reduced or eliminated by available carry forward three years before they exceeded.
Members should retain a copy of their carry forward calculations to assist with any queries from HMRC.
For those of you seeking reassurance that you will get your carry forward calculations correct HMRC’s website provides a carry forward tool called ‘The enhanced pension savings annual allowance calculator’ and which can be found on their ‘Pension savings annual allowance calculators introduction’ web page.
Thanks for watching.