One of the most common queries from advisers recently has been the use of carry forward of unused pension contribution allowances. Some advisers believe that the Annual Allowance (AA) may be fair game for the Chancellor soon, as one of the least painful and least complex reductions in cost to the Treasury. Therefore, the need to contribute whilst you can and maximise carry forward comes to the fore. 

There are numerous “trip hazards” with carry forward so let us start with the basics. 

The client must be a member of a registered pension scheme in the tax year from which any carry forward is to be claimed. They need not have been an active member, or have contributed at all but membership is essential. 

It is the unused allowance that is carried forward and then tax relief is granted in the tax year in which payment is made. If the pension contributions are to be personal, the client must have enough net relevant earnings for the tax year to cover the intended total personal contributions in the given tax year. If the pension contributions are to be corporate, then they should meet the “wholly and exclusively for the purpose of the business” test, if corporation tax relief is to be granted.

Perhaps the next step is to determine the client’s AA in the current tax year. Firstly, check that no events have triggered the money purchase annual allowance (MPAA) because if it has, contributions will be limited to £4,000pa and the client cannot carry forward any unused MPAA. 

Secondly, determine whether both the client’s “threshold income” exceeds £110,000 and their “adjusted annual income” exceeds £150,000. If this is the case, they will have a tapered AA for that tax year. Do remember that any intended corporate contribution for the current year’s AA, or for any carried forward allowances, is added to the client’s adjusted annual income, potentially reducing their current AA.
Carry forward is only available from the three immediately preceding tax years, starting with the earliest, therefore:

  • For the tax year 2018/19, after first using up that year’s allowance, the earliest will be 2015/16
  • Once that has been used, further unused allowance can be carried forward from the tax year 2016/17 and then 2017/18
  • Failure to utilise any unused allowance from the tax year 2015/16 before 6 April 2019 will see the allowance drop out of the equation. 

Remember that the 2015/16 tax year was the year in which HMRC aligned pension input periods (PIPs) with the tax year and depending on dates paid; contributions in that tax year may affect the carry forward allowance.

Also, remember that 2016/17 was the first tax year in which the tapered annual allowance was introduced, so the client’s threshold and adjusted annual incomes for that year will also be needed to determine the amount of unused allowance available to carry forward from that year.

Even if your clients are not making full use of the AA this year, it would be wise to request and record their total income, from all sources, so you are able to field enquiries about carry forward in subsequent years. It would also be prudent to collect contribution details, both personal and corporate to all of the client’s schemes; both defined contribution and defined benefit.