Carry forward – where do people go wrong?

26 January 2022

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To help you avoid common carry forward mistakes at tax year end, Fiona Hanrahan, Intermediary Development and Technical Manager outlines where people go wrong and what to watch out for.

Unused annual allowance 

In the run up to tax year end, your clients will likely be looking to make use of their 2021/22 allowances and reliefs, if they haven’t already.  If they're 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's 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.   

We've checked several hundred carry forward calculations over the years and want to share common mistakes with you, so you know what to watch out for.  

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're using carry forward, you're 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's £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.

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's triggered the MPAA, then it’s not possible to use carry forward to increase contributions to defined contribution schemes above £4,000 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 the 2016/17 tax year onwards. So in theory, this 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 of £40,000 is simply substituted by the tapered annual allowance for each year it applies. Remember that the taper parameters changed with effect from 6 April 2020, so you could be using two different methods of calculating the reduction due to the taper.

Not handling employer contributions correctly

Employer contributions as well as individual and third party contributions count towards the annual allowance. So these should be included when working out unused annual allowance. 

Not handling 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 know there will be no annual allowance remaining from that year to carry forward to the current year. 

Getting confused about the eligibility for carry forward

Anyone who was a member of a pension scheme in the year they're carrying forward from is eligible to use carry forward to the current year.  The definition of member 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's not necessary to make contributions using carry forward to a current scheme, these can be made to a brand new scheme.

Try and calculate DB pension input amounts themselves

When working out the available annual allowance for a DB scheme, it's 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.

Forgetting about the complications of the 2015/16 tax year

A carry forward calculation for 2021/22 won't normally include the 2015/16 tax year, but it might still be necessary to be aware of the differences for 2015/16. For example, you might be checking a historic carry forward for a client or checking there's enough carry forward to cover a previous year.  For 2015/16, the pre alignment period (the period between 6 April 2015 and 8 July 2015) had an annual allowance of £80,000, with a maximum of £40,000 able to be carried forward to the post alignment period, which was the remainder of the tax year. 

Summary

Knowing the most common mistakes people make with carry forward calculations will hopefully make sure you're fully prepared for tax year end, saving you time and potentially a tax charge for your clients.

About the author

Fiona Hanrahan

Pensions Development and Technical manager

Fiona has worked in financial services since leaving the University of St Andrews in 1998. She has worked mainly in technical roles although has also worked as a Chartered Financial Planner. She has worked for Royal London since 2015. Fiona is involved in developing adviser facing content, presenting, writing articles and commenting for the press. Fiona is a fellow of the Personal Finance Society and has an MBA from the Open University. She is also the current president of the Insurance Society of Edinburgh. Fiona has young twins who take up most of her spare time although she likes visiting new cities, going to the cinema and keeping fit.

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.