The pension carry forward rules are great for savers and worth getting to grips with. In short: they allow you to make use of unused annual allowance from previous tax years – meaning you could be able to pay more into your pension than you expected. Here’s a quick explanation of the pension carry forward rules and what they mean in practice.
Remember that tax rules can change and that the value of any tax benefits are based on your unique circumstances.
An introduction to annual allowance
To make sense of the pension carry forward rules, we first have to understand annual allowance. Your annual allowance is the amount you can save into your pension in a given tax year. Since 2014/2015 that value has been set at £40,000.
Okay, so what is pension carry forward?
The pension carry forward rules allow you to make use of unused allowances from previous tax years. So if in a given tax year you are set to exceed your £40,000 annual allowance, you can file excess contributions against previous years where you invested less than £40,000.
The rules allow you to carry forward from the last three tax years, up to a maximum of £120,000 – less whatever you invested in your pension in those years – to claim unused tax relief on your excess contributions for the current year.
The pension carry forward rules are great if you have a year of bumper earnings, inherit a lump sum, or if you’re a self-employed sole trader and your earnings fluctuate significantly from year to year. It means you can use unused tax relief from previous years to save more efficiently into your pension.
How much can you carry forward?
The amount you can carry forward will vary based on how much unused annual allowance you have from the three previous tax years. While calculating your annual allowance, you need to include:
your pension contributions
contributions that your employer has made to your pension
the value of any benefits accrued in a defined benefit scheme
REMAINING ANNUAL ALLOWANCE
Using the examples above, our hypothetical saver has reached their annual allowance for the 20/21 tax year. However, the sum total of remaining allowance from previous tax years amounts to £60,000. That means our saver could make £100,000 of tax-free savings into their pension during the 20/21 tax year.
Things work slightly differently if you are a high earner, as your annual allowance may be reduced. And if the value of your total taxable income PLUS contributions your employer has made to your pension exceeds £150,000 in a single tax year, your annual allowance may be ‘tapered’. Talk to us and we can advise you.
Are the pension carry forward rules applicable to everyone?
You can make use of the pension carry forward rules as long as:
you’re an active pension scheme member
you’ve had a pension in each of the years from which you’re carrying forward
you’re a deferred pension member with paid-up pension benefits
you’re a pensioner member, in receipt of pension benefits from your pension scheme, or a pension credit member, where you have a share of your ex-partner’s pension scheme
The annual allowance thresholds are in line with the tax calendar – which runs from the 6th April to 5th April. So the deadline to make use of unused allowance from the 2017/2018 tax year is 5th April 2021.
Need some advice?
The pension carry forward rules are fantastic for keen savers because they allow you to maximise the available tax relief on your pension contributions. If you would like to discuss additional ways to save efficiently for your future, get in touch. We can help you.
Nothing in this article constitutes, or is intended to constitute, financial advice. You should always seek advice from a professional financial adviser who is familiar with this type of arrangement to ensure any recommendations made are suitable to your needs and circumstances. The information contained in this article is based on our current understanding of taxation and regulations as at April 2020. The FCA does not regulate tax advice.
This article was written by Adam Prestwood.