Carrying forward unused annual allowance from earlier years [s228A FA04]

The three year carry forward rule

If an individual has a pension input amount of more than £50,000 for a tax year from 2011–12 onwards they may still not be liable for an annual allowance charge for that year. They can carry forward any annual allowance that they have not used in the previous three tax years to the current tax year. This amount of unused annual allowance can then be added to the current year's annual allowance. This will give them a higher amount of available annual allowance to off-set against that year's pension input amount.

The three year carry forward rule allows an individual to make occasional large amounts of pension savings without having to pay the annual allowance charge.

For example, if the individual is self-employed and in one year makes a large profit, they could make pension contributions that are larger than normal and are also above the annual allowance level. This will depend, of course, on the amount of contributions that they have been paying in pension input periods that end in the previous three tax years and the amount of unused annual allowance that they have available to carry forward.

For a member of a defined benefits arrangement a large pay increase, for example following promotion, could make their pension input amount a lot bigger than usual. The three year carry forward rule means that such a one-off increase in their pension input amount is less likely to produce an annual allowance charge.

When can a member carry forward unused annual allowance?

[s238A(3) & (4) FA04]

To carry forward unused annual allowance from a previous year, the individual must have been a member of a registered pension scheme at some point in the earlier tax. So, if the individual was a member of a registered pension scheme but, in one particular year, did not have a pension input amount for that year then they can carry forward an annual allowance of £50,000 from that year. If they were not a member of a registered pension scheme then they will not have unused annual allowance to carry forward from that year.

A member includes an active member, a pensioner member, a deferred member or a pension credit member of a pension scheme. If, for example, in the tax year 2010–11 the member was a deferred member with no accrual anywhere, but had past deferred pension rights in a registered pension scheme only, the member would have unused annual allowance of £50,000 for that tax year.

As the requirement is to have been a member of a registered pension scheme specifically at some point in a tax year, it is possible to have an unused annual allowance to carry forward even where there is no pension input amount for that tax year. For example, an individual joins a registered pension scheme for the first time on 1 June 2009 with a first pension input period of 1 June 2009 to 1 June 2010. The first tax year that they will have a pension input amount is 2010–11 but as they were a member of a scheme in the 2009–10 tax year they will have a deemed unused annual allowance of £50,000 to carry forward.

The effect of carry forward

If the individual's pension input amount for the tax year is less than their available annual allowance there will be no annual allowance tax charge. If an individual's pension input amount is more than their available annual allowance then they will be liable to the annual allowance charge on the amount over their available annual allowance.

Where an individual has unused annual allowance that they want to use to set off against an annual allowance charge for a later year, they do not have to include this on their Self-Assessment tax return for the year in which the unused allowance arose or for the year that they want to set this off against an annual allowance charge.

Example 1

Raj is a self-employed plumber. In the previous three years Raj has made contributions of £40,000, £20,000 and £30,000 to his pension arrangement. Raj has had a good trading year and wants to use part of his higher profits to increase his pension fund.

In the past three years Raj has not used all his £50,000 annual allowance. He has £60,000 unused annual allowance that he can carry forward to this tax year. Raj can make a contribution of £110,000 without having to pay the annual allowance charge.

Example 2

Rose is an NHS nurse and her pension scheme will provide a pension of 1/80th final pay for each year of service plus a lump sum of 3 × her pension. Her level of pay and length of service mean that her pension saving amount is normally between £8,000 and £9,000 each year.

Rose gets promoted to ward sister and as a result gets a £6,000 pay rise. Because of her large pay rise and because this means that her pension is based on this pay for all of her years of service, Rose's pension saving for this year is £55,000. This is more than the £50,000 annual allowance.

As Rose has not used all her annual allowance in the last three tax years she can carry forward her annual allowance. Rose has unused annual allowance of over £120,000 to carry forward. This means that Rose does not have any annual allowance charge on her unusually high pension savings of £55,000.

How available annual allowance is used up

[s228A(6) & (7) FA04]

There is a strict order in which available annual allowance must be used-up. The annual allowance for the current tax year should be used first. The unused annual allowance from earlier years is then used, beginning with available annual allowance from the earliest tax year first.

If one of the previous three years has an input amount of more than the annual allowance then that excess is treated as using up any amount of available annual allowance from the preceding year(s) first and this will reduce the available annual allowance to be carried forward to the current year.

However, the position for the tax years 2008–09, 2009–10 and 2010–11 (where a deemed annual allowance of £50,000 applies for this purpose) is different when the pension input amount is more than £50,000 in 2009–10 and/or 2010–11 and there is available annual allowance from a preceding year(s). RPSM06108030 has more details.

Example 3

Sybille has total pension savings of £65,000 for the 2014–15 tax year. The annual allowance is £50,000.

In the previous three tax years her pension input amounts were:

2013–14-£35,000

2012–13-£30,000

2011–12-£25,000

If the annual allowance for each of those years was £50,000 Sybille has unused annual allowance from those three tax years:

2013–14-£15,000

2012–13-£20,000

2011–12-£25,000

This means Sybille has £60,000 unused annual allowance to carry forward to 2014–15.

Together with the £50,000 annual allowance for the 2014–15 tax year, Sybille can have pension saving of £110,000 without the annual allowance charge being due.

Sybille's pension input amount for the 2014–15 tax year is less than her available annual allowance. She does not have to pay an annual allowance charge.

Sybille has used up the £50,000 annual allowance for the current tax year and £15,000 unused annual allowance from three years ago i.e. 2011–12. Although she still has £10,000 unused annual allowance from three years ago she cannot carry this forward to the next tax year. You can only carry forward unused annual allowance from the last three years and next year, i.e. 2014–15, the £10,000 unused amount will be from four years ago and so will be out of time and not available.

Sybille has £35,000 unused annual allowance that she can carry forward to next tax year. If the annual allowance in the next tax year is still £50,000 she will be able to have a pension input amount of £85,000 and still not have any annual allowance charge.

Example 4

Sam's total pension input amount for 2014–15 is £52,000. This is £2,000 more than the annual allowance of £50,000. Sam will have an annual allowance charge on £2,000 if she has no available annual allowance to carry forward from earlier years. Her total pension input amounts for those years are:

2013–14-£54,000

2012–13-£44,000

2011–12-£49,000

Sam has £1,000 unused annual allowance from 2011–12 and £6,000 from 2012–13. Sam's total pension input amount for 2013–14 is more than the annual allowance so she has no available annual allowance to carry forward from that year.

Sam can only carry forward unused annual allowance if it has not been used up by a pension input amount that is more than the annual allowance in a later tax year. As Sam's total pension input amount for 2013–14 is more than £50,000 this will reduce the amount of annual allowance she can carry forward. The £4,000 pension input amount that is more than the 2013–14 annual allowance will use up Sam's available annual allowance from earlier years as follows:

2011–12-£1,000

2012–13-£3,000

Sam has £3,000 available annual allowance to carry forward to 2014–15. So, in 2014–15 Sam can have a total pension input amount of £53,000 before she has to pay an annual allowance charge. Sam's actual pension input amount of £52,000 is less than this so she has no annual allowance charge for 2014–15. She also has £1,000 annual allowance available from 2012–13 to carry forward to 2015–16.

In 2015–16 Sam's total pension input amount is £55,000. This is £5,000 more than the annual allowance of £50,000. Sam has £1,000 available annual allowance to carry forward from the previous three years so she will have an annual allowance charge on £4,000.