Carry forward calculations

Conducting carry forward of annual allowance calculations can prove complex. It doesn’t have to be. We find following the process below a good way to work out the carry forward available to an individual.

We have split the process into two steps:

Step 1

Check if the individual is subject to the tapered annual allowance

Individuals who have taxable income for a tax year of greater than £240,000 will have their annual allowance for that tax year restricted. It will be reduced, so that for every £2 of income they have over £240,000, their annual allowance is reduced by £1. Any resulting reduced annual allowance is rounded down to the nearest whole pound.

The maximum reduction is £36,000, so anyone with income of £312,000 or more will have an annual allowance of £4,000. Individuals with high income caught by the restriction may have to reduce the contributions paid by them and/or their employers or suffer an annual allowance charge.

However, the tapered reduction doesn't apply to anyone with 'threshold income' of  £200,000 or less.

Between 6 April 2016 and 5 April 2020 - Individuals who had taxable income greater than £150,000 had their annual allowance restricted. It was reduced, so that for every £2 of income they had over £150,000, their annual allowance was reduced by £1. The maximum reduction was £30,000, so anyone with income of £210,000 or more had an annual allowance of £10,000. 

See our articles Tapering of annual allowance for high incomes - adjusted and threshold incomes and HMRC Pensions Tax Manual - PTM057100: Annual allowance: tapered annual allowance

Example

You’ll need to know the individual’s threshold income and adjusted income for the tax year where carry forward is being used and for the previous 3 tax years (or more if carry forward has already been used in an earlier tax year).

Understanding the two definitions becomes easier if we consider taxable income from a more practical viewpoint. For example, when someone says 'I earn £x', they don't usually mean the amount after the deduction of net pay arrangement contributions. We can therefore assume that when someone has earnings of £160,000 and pays contributions of £20,000 under the net pay arrangement, they'll say their earnings are £160,000, not £140,000. The £160,000 includes the pension contributions. 

Tax yearThreshold income 1Adjusted income 2Subject to taper? (Y/N)Available annual allowance 3
2018/19 £80,000 £110,600 N £40,000
2019/20 £130,000 £160,000 Y £35,000
2020/21 £210,000 £230,000 N £40,000
2021/22 £220,000 £280,000 Y £20,000
2022/23 £280,000 £320,000 Y £4,000

1 Click here to see a worked example on how to calculate threshold income.
2 Click here to see a worked example on how to calculate adjusted income.
3 As the adjusted income is over £240,000 in some of the years, the annual allowance is calculated as: £40,000 – ((adjusted income - £240,0004) x ½). Click here for an example of how the tapered annual allowance is calculated.
4 £150,000 between 6 April 2016 and 5 April 2020.

Step 2

Using the template below, calculate the carry forward available

Tax yearAnnual allowanceTotal contributionsCarry forward availableCarry forward usedCarry forward remaining
           
           
           
           
           
           

Let’s look at a worked example:

Tax yearAnnual allowance5Total contributions6Carry forward availableCarry forward usedCarry forward remaining
2018/19 £40,000 £20,000 £20,000 £15,0007 £5,0008
2019/20 £35,000 £30,000 £5,000 £5,0009 None
2020/21 £40,000 £15,000 £25,000 £1,00010 £24,00011
2021/22 £20,000 £35,000 None None None
2022/23 £4,000 £10,000 None None None

5 Annual allowance figures in this example are based on the tapered annual allowance in the table earlier in this article.

6 For defined contributions plans, this is the amount of contributions made during the pension input period. For defined benefit, it is the value of benefits accrued over the pension input period. You should ask the relevant scheme for this information.

7 £15,000 of carry forward available in 2018/19 is used to cover the excess for the 2021/22 tax year.

8 The remaining £5,000 available will go unused.

9 £5,000 of carry forward available in 2019/20 is used to cover some of the excess for the 2022/23 tax year.

10 £1,000 of carry forward available in 2020/21 is used to cover the remaining excess in the 2022/23 tax year.

11 £24,000 can be carried forward into the 2023/24 tax year if required.

 

Things to remember

  • Even after using carry forward, tax relief on individual contributions is restricted to the higher of £3,600 or 100% of relevant UK earnings.
  • If the money purchase annual allowance applies, it’s not possible to carry forward unused annual allowance to a defined contribution plan.

Threshold income

An individual’s threshold income is found by taking the following steps:

  1. Start with the individual’s taxable income (including all earnings and investment income).
  2. ADD any employment income given up for pension contributions (such as a salary exchange arrangement) set up after 8 July 2015.
  3. DEDUCT the amount of any personal contribution (gross amount) made using relief at source or net pay arrangement.
  4. DEDUCT any taxed lump sum death benefits received.

Adjusted income

An individual’s adjusted income is found by taking the following steps:

  1. Start with an individual’s taxable income (including all earnings and investment income).
  2. ADD the value of an any employer contributions (for money purchase this is the value of the contributions. For defined benefits, this is the pension input amount and will be provided by the scheme).
  3. DEDUCT any taxed lump sum death benefits received.

Worked example of threshold income

In 2018/2019 Andy, an employee of Widgets Plc, has a salary of £90,000 and as a member of his employer’s scheme, pays 10% of his salary (£9,000) through a net pay arrangement. Andy’s employer pension input amount is £18,000.

Andy also pays £240 net per month into a separate personal pension scheme.

Andy has £4,000 interest from savings (however £1,900 is from an ISA so is not subject to tax) leaving savings income of £1,100 subject to tax, after the personal savings allowance of £1,000.

Andy also has a portfolio of shares of £3,500, leaving a dividend income of £1,500, after the dividend allowance of £2,000.

Step 1 – Andy’s net income is:

Employment income - £90,000
+Savings income - £1,100
+Dividend income - £1,500
= £92,600

Step 2 – Andy hasn’t entered into a salary exchange arrangement so there is nothing to add at step 2 in respect of a relevant salary exchange arrangement.

= £92,600

Step 3 – Deduct the amount of contributions paid using relief at source and net pay arrangement.

Relief at source (£240 + £60 tax relief) x 12 = £3,600
Net pay arrangement = £9,000
= £92,600 - £3,600 - £9,000 = £80,000

Step 4 – Andy has received no taxed lump sum death benefits so there’s nothing to deduct.

Andy’s threshold income = £80,000

Worked example of adjusted income

Please refer to the threshold income example for the background information:

Step 1 – Andy’s net income is £92,600

Step 2 –  ADD the employer contributions of £18,000 = £92,600 + £18,000 = £110,600

Step 3 – Andy has received no taxed lump sum death benefits so there’s nothing to deduct.

Andy’s adjusted income is £110,600

Worked example of the tapered allowance

Andy’s threshold income for the 2021/22 tax year is £220,000 and adjusted income is £280,000. This means Andy is caught by the tapered annual allowance.

  • £280,000 - £240,000 = £40,000
  • £40,000 / 2 = £20,000
  • £40,000 - £20,000 = £20,000

Andy’s tapered annual allowance for 2021/22 is £20,000

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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