Calculating the amount of unused annual allowance to carry forward

[s228A FA04]

Unused annual allowance can be carried forward automatically and does not need to be notified by the individual to HMRC or the scheme administrator. An individual does not need to show this on their tax return if their unused annual allowance means that an annual allowance tax charge is not due for a particular tax year.

To see if an individual has an annual allowance charge they need to take the following steps:

Work out the total pension input amount for the tax year.

The individual will need to add together the pension input amounts for all arrangements that they have under registered pension schemes, and relevant overseas schemes (see RPSM06105020 – ‘Who do the annual allowance rules apply to?’).

The calculation of the pension input amount will vary depending upon the type of arrangement. The following show how this is calculated in:

Cash balance arrangements (RPSM06107040)

Other money purchase arrangements (RPSM06107020)

Defined benefits arrangements (RPSM06107030)

Hybrid arrangements (RPSM06107050)

If a member's pension input amount in a single scheme is more than the annual allowance for the tax year, i.e. £50,000 for 2011–12, the scheme administrator should automatically tell the member the total value of their pension input amount for all arrangements under that scheme over the pension input period (PIP) ending in the tax year. A member can also ask their pension scheme to provide that information. RPSM06107500 explains the scheme administrator's responsibility to provide a member with information about their pension input amount.

Is the total pension input amount more than the annual allowance?

If the answer is no, then the individual will not have to pay the annual allowance charge and there is no need to carry out any more steps.

If the answer is yes, then go to the next step.

Total pension input amount for the tax year is more than the annual allowance

Work out how much the total pension input amount was for each of the last three tax years. If one or more of these tax years is before 2011–12 then the post 6 April 2011 rules should be used to work out the pension input amount for these years. There is more information about valuing pre 6 April 2011 pension inputs at RPSM06108030.

A member can ask their scheme administrator to tell them the amount of their pension saving under that scheme for the last three tax years.

Work out how much unused annual allowance there is for these three years and add any unused annual allowance to the £50,000 available for the current year. This is the available annual allowance. 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 (but see RPSM06108030, which gives details of when this general principle does not apply in relation to tax years before 2011–12).

Is the available annual allowance more than the total pension input amount for the relevant tax year?

If the answer is yes then there will be no annual allowance charge. Although there is no need to contact HMRC to make a claim or election for this carry forward, the member will need to keep a record in case their pension input amount exceeds the annual allowance in a subsequent year.

If the answer is no then the annual allowance charge is due on the amount of the pension input amount that is more than the available annual allowance.Where the member has an annual allowance charge, they will need to include this on their Self Assessment tax return.

If their pension input amount in one pension scheme is more than the annual allowance i.e. £50,000 for 2011–12 and the amount of the annual allowance charge is more than £2,000 then the member can ask their scheme to pay the annual allowance charge for them. If they do this then their amount of pension benefits that they receive will be reduced to reflect the amount the pension scheme has paid on their behalf. This is known as “Scheme Pays”

For more information about ‘Scheme Pays’, see RPSM06109020.