Carry forward made easy(ish)

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:

Tax yearContributions
2018/19 £30,000
2019/20 £25,000
2020/21 £35,000
2021/22 (so far) £20,000
Tax yearAnnual Allowance Total contributions/ pension input amount Annual allowance available to carry forwardCarry forward usedCarry forward remaining
2018/19 £40,000 £30,000 £10,000 None £10,000
2019/20 £40,000 £25,000 £15,000 None £15,000
2020/21 £40,000 £35,000 £5,000 None £5,000
2021/22  £40,000 £20,000 £20,000 None £20,000
        Total £50,000

Kate can therefore pay another £50,000 in 2021/22 without an annual allowance charge, on top of the £20,000 she’s already paid in this tax year. Of course, she’ll need to have earnings of at least at least £70,000 in 2021/22 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:

Tax yearContributions
2017/18 £20,000
2018/19 £30,000
2019/20 £15,000
2020/21 £35,000
2021/22 (so far) £20,000

However, in 2020/21 his annual allowance was subject to a tapered reduction because of his earnings and in 2021/22, his projected earnings will also result in a tapered annual allowance.

Tax yearAnnual Allowance Total contributions/ pension input amount Annual allowance available to carry forwardCarry forward usedCarry forward remainingNotes
2017/18 £40,000 £20,000 £20,000 £5,000 N/A for 2021/22 £5,000 used to cover contributions paid in 2020/21
2018/19 £40,000 £30,000 £10,000 None £10,000  
2019/20 £40,000 £15,000 £25,000 None £25,000  
2020/21 £30,000 £35,000 None £5,000 None  
2021/22  £25,000 £20,000 £5,000 None £5,000  
        Total £40,000  

There’s an excess over the annual allowance in 2020/21 of £5,000. However, going back 3 tax years to 2017/18, there’s unused annual allowance of £20,000, £5,000 of which can be used to cover the excess in 2020/21. 2017/18 then drops out of the calculation as it’s too early to be used in 2021/22. There is no unused annual allowance available from 2020/21.

Tom can therefore pay another £40,000 in 2021/22 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 2021/22 to get tax relief on the total contributions paid.

Further information

Note

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.

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