Carry forward made easy
Carry forward calculations can be complicated. In this case study we look at how the tapered annual allowance interacts with the carry forward rules.
There are calculators available of course but they just do the arithmetic – you still must get the input right. With some calculators it’s difficult to see what the primary data is which makes checking a challenge. Use of a simple table can be much clearer.
Case study one
Kate has paid:
|2023/24 (so far)||£20,000|
|Tax year||Annual Allowance||Total contributions/ pension input amount||Annual allowance available to carry forward||Carry forward used||Carry forward remaining|
Kate can therefore pay another £70,000 in 2023/24 without an annual allowance charge, on top of the £20,000 she’s already paid in this tax year. Of course, unless they are employer contributions, she’ll need to have earnings of at least at least £90,000 in 2023/24 to get tax relief on the total contributions paid.
The table is even more useful in more complicated cases, say when the tapered annual allowance applies in some of the years or the annual allowance has been exceeded before.
Case study two
Tom has paid:
|2023/24 (so far)||£20,000|
However, in 2022/23 his annual allowance was subject to a tapered reduction because of his earnings and in 2023/24, his projected earnings will also result in a tapered annual allowance.
|Tax year||Annual Allowance||Total contributions/ pension input amount||Annual allowance available to carry forward||Carry forward used||Carry forward remaining||Notes|
|2019/20||£40,000||£20,000||£20,000||£5,000||N/A for 2021/22||£5,000 used to cover contributions paid in 2022/23|
There’s an excess over the annual allowance in 2022/23 of £5,000. However, going back 3 tax years to 2019/20, there’s unused annual allowance of £20,000, £5,000 of which can be used to cover the excess in 2022/23. 2019/20 then drops out of the calculation as it’s too early to be used in 2023/24. There is no unused annual allowance available from 2022/23.
Tom can therefore pay another £40,000 in 2023/24 without an annual allowance charge, on top of the £20,000 he has already paid in this tax year.
Care should be taken where the tapered annual allowance applies. It would seem logical that he has sufficient earnings to cover a £60,000 personal contribution if he is caught by the taper, but is that correct? The “income” definition for the tapered annual allowance includes income from a variety of sources, including investment income. He’ll need to have relevant UK earnings, not investment income, of at least £60,000 in 2023/24 to get tax relief on the total contributions paid.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.