Pension Carry Forward Explained

One of the major benefits of paying into a pension is tax relief, and if you have any unused annual pension allowance from previous tax years, you should be able to maximise the amount you receive by taking advantage of the ‘carry forward’ rule.

What are the Carry Forward Rules

?The Pension Carry Forward Rules define how someone can carry any unused amounts of their annual contribution allowance from previous years into the present one. This enables them to make larger pension contributions than what their current yearly limit permits.

You can pay a maximum of either ￡40,000 or 100% of your earnings into a pension every tax year and receive tax relief at your marginal rate. This is termed your 'annual allowance'. Depending on your paid rate of tax, for every ￡100 added to your pension it will instead cost you ￡80 if you're a basic-rate taxpayer, ￡60 if higher-rate, or only ￡55 as an additional rate taxpayer.

You can increase your pension contribution beyond the annual allowance by utilising carry forward. This is if you have not maximised your allowance in the last three years and could be a great way to build up your retirement savings while taking advantage of tax relief, particularly as you near retirement age.

In this article I will tell you everything you need to know to take advantage of the carry forward rules and boost your pension pot.

This rule permits you to carry forward unused annual allowances from three previous tax years, and this can could allow you to make a sizable contribution to your pension.

If you are not able to contribute the maximum contribution of ￡40,000, to your pension each year; you can save it for future use. When you get the chance, you can put money into your pension fund - perhaps if you receive a pay rise or extra cash from an inheritance or work bonus.

You need to bear in mind that your contributions must not exceed your earnings for a particular tax year; even if the pension carry forward rule is employed. To illustrate this, if you earned ￡50,000 in a tax year, you can only add ￡50,000 to your pension pot during that time period - comprising of any allowances brought forward.

If you have a significant amount of money that exceeds your income, one way around this is to split your pension payments over several tax years. Alternatively, you may choose to use carry forward if you make regular payments into your pension, by increasing the amount you pay into your pot on a monthly basis, as well as pay a lump sum into your pension at any time.

Remember you should adhere to the allowances when it comes to adding extra contributions carried forward. Should you exceed it, a tax charge will come into play, effectively invalidating any relief given. Keeping within the limits is key.

Pension Annual Allowance

The pension annual allowance at 100% of your earnings or ￡40,000 (or potentially less if you’re a high earner, in which case see the tapered annual allowance below) includes contributions you pay into your pension, employer contributions, and tax relief received on these.

The annual allowance has stood at ￡40,000 or 100% of your earnings, whichever is lower, since the 2014/15 tax year (after falling from ￡50,000), and this figure is not expected to rise anytime soon.

Can you transfer unused annual allowances forward?

Before applying pension carry forward, confirm you are eligible to employ this regulation by looking over the following points:

• ???To be eligible to use carry forward, you must have used up all your pension annual allowance for the relevant tax year.
• To be eligible for pension carry forward, it's necessary to have made a total contribution lower than the annual allowance in at least one of the three most recent tax years.
• You must earn at least the amount you want to contribute in the tax year you are making the contribution for. For example, if you want to pay a total (including carry forward) of ￡60,000 into your pension, you must have earned at least ￡60,000 in that tax year.
• For the tax year from which you want to carry forward, you must have been a member of a registered pension scheme, but you do not need to have paid into it that particular year.
• If you wish to carry forward any unutilised annual allowance, it's best to start with the oldest one available to prevent it expiring in future years.
• If you are affected by the tapered annual allowance, it is important to accurately calculate how much can be carried over. If you are unsure of the total amount that can be paid into your pension, it is highly recommended to seek professional advice.

Check if You Have Unused Allowance

You can easily ascertain how much of your annual allowance you have used up this tax year by using the government's annual allowance calculator. However, if you are uncertain of how much more you can contribute in a particular tax year due to previous allowances used, your pension provider will be able to provide guidance.

Tapered Annual Allowance

Calculations to determine how much you can carry forward become more complicated if you are subject to the Tapered Annual Allowance, implemented in April 2016.

This is pertinent when high earners calculate the tax relief they may claim on their pension contributions. For each ￡2 of income earned over ￡240,000, your annual allowance reduces by ￡1, down to a floor of ￡4,000. Therefore, the maximum exclusion from your allowance is ￡36,000.

Those earning over ￡312,000 in a year will be able to contribute a maximum of ￡4,000 to their pension. If no contributions were made in that tax year, then you can carry forward this allowance and use it in later years.

As the rules around the tapered annual allowance have now changed, it is important to know your limits to work out how much you can pay into your pension using carry forward.

Seek professional advice if you are affected by this.

You can use this link HERE to book a FREE health check on your pension.

Self-employed and Directors of Ltd companies

Carry forward can be particularly useful if you are self-employed and the amount you earn changes each year. In this scenario, with a fluctuating income, you may want to keep hold of your earnings to meet day-to-day costs and pay your tax bill, and only decide how much you want to pay into your pension when you know what’s affordable that year.

?You can then decide to pay a lump sum into your pension and make use of the carry forward rule if it’s been a bumper year. However, remember that to receive tax relief your earnings need to be the same or more than your total pension contributions in the tax year you make them.

Alternatively, if you run your own limited company, you can choose whether any pension contributions come from the company, or if they are made as a personal contribution.

However, you need enough income (salary payments) to meet the contribution for tax relief to apply.

For example, if you want to contribute ￡10,000 in a tax year as a personal pension contribution, your earnings on which you pay tax (your salary, not including your dividends) must amount to at least the same amount.

If you are a business owner and paying into your pension directly from the company, then you can generally pay any amount in, without needing to worry about the sum not exceeding earnings.

In this case, your contributions can be considered a business expense for tax purposes (reducing liability to corporation tax). Company contributions still count towards your annual allowance, and you can make use of the carry forward rule. Beware, though, that if you pay a large sum into your pension via your company, this will reduce your profits and dividend payments.

Pension Health Check

It is essential that you get a pension health check. This review will help you to understand your current situation and provide the information you need to make wise decisions about the future.

If you need help with your pension and retirement planning, Gardner Financial Management is offering a complimentary Pension Health Check.

HERE is a link that explains the service and allows you to book a meeting.

During the call, we can provide you with useful information and advice, and at its conclusion determine whether you would benefit from professional financial guidance.