Carry forward – where do people go wrong?
In the run up to tax year end your clients will likely be looking to make use of their 2025/26 allowances and reliefs if they haven’t already.
If they are looking to pay the maximum into their pension without a tax charge applying, then it will likely be necessary to work out their unused annual allowance using carry forward. When using carry forward, it is important to be accurate, as the consequences of getting the calculation wrong can mean an annual allowance tax charge for the client, or even contributions needing to be refunded.
Over the years at Royal London our Technical Team has checked hundreds of carry forward calculations so they have a very good idea of where the main mistakes are made. I thought I’d share these with you so that you don’t do the same.
Where do people go wrong?
The main mistakes people make when working out unused annual allowance are listed below:
Getting mixed up between annual allowance and tax relief
When you are using carry forward, you are working out the unused annual allowance not unused tax relief. So, it’s important to remember that for an individual contribution, the client will still need earnings in the year of payment to support the contribution. For example, if there is £100,000 worth of unused annual allowance, the client will need earnings of at least this in order to make an individual contribution of this level and receive tax relief.
A client with earnings of less than £60,000 will likely not need to use carry forward if they are making an individual contribution as this is within the standard annual allowance for 2025/26.
Forgetting about the Money Purchase Annual Allowance (MPAA) or tapered annual allowance
Both of these have an impact on how much annual allowance is available. If the client has triggered the MPAA, then it’s not possible to use carry forward to increase contributions to defined contribution schemes above £10,000 without an annual allowance tax charge applying. Carry forward will still be available for any defined benefit (DB) schemes.
The tapered annual allowance rules apply from tax year 2016/17 onwards. So in theory, could apply to all four tax years in the carry forward calculation. If the taper does apply, carry forward can still be used and the standard annual allowance in that year is simply substituted by the tapered annual allowance for each year it applies. Remember also the taper parameters changed with effect from 6 April 2023, so you could be using two different methods of calculating the reduction due to the taper within your carry forward calculation.
Don’t handle employer contributions correctly
Employer contributions, as well as individual and 3rd party contributions, count towards the annual allowance. So, these should be included when working out the unused annual allowance.
Don’t handle a previous carry forward correctly
When using carry forward, you maximise the current year first before going back to your earliest year and work forwards. So, if an earlier year includes a contribution of more than the annual allowance for that year, you therefore know there will be no annual allowance remaining from that year to carry forward to the current year.
Get confused about the eligibility for carry forward
Anyone who was a member of a pension scheme in the year they are carrying forward from is eligible to use carry forward in the current year. The definition of carry forward for this purpose is very broad and includes active, deferred, pension credit and pensioner members. Really the only clients not eligible to use carry forward would be those taking out a pension for the very first time. It is not necessary to make contributions using carry forward to a current scheme, these can be made to a brand new scheme.
Trying to calculate DB pension input periods themselves
When working out the available annual allowance for a DB scheme, it is important to obtain a history of pension input amounts from the scheme. The calculation of the pension input amount can be complicated and different schemes will have different ways of calculating pensionable service and salary. Changed annual pension inputs in Public Sector DB schemes as a result of the McCloud remedy also present a challenge here.
Underestimate the lifetime allowance (LTA) protection and the impact on pension funding
The LTA was completely removed from 6 April 2024, but LTA protection can still be a valuable benefit potentially allowing higher lump sum allowance or lump sum and death benefit allowance. Clients with LTA protections secured prior to 15 March 2023 can pay into pensions without their protections being affected. So, carry forward could in theory allow for a large contribution with no tax charge applying in cases where enhanced or fixed protection applies.
Knowing the most common mistakes people make with carry forward calculations will hopefully make sure you are fully prepared for your tax year end, saving you time and potentially a tax charge for your clients.
