Carry forward calculations
Conducting carry forward of annual allowance calculations can prove complex. It doesn’t have to be. We find the following process is an easy way to work out how much unused annual allowance is available to carry forward
We have split the process into two steps:
Step 1 - check if the individual is subject to the tapered annual allowance
Check if the individual is subject to the tapered annual allowance
Individuals who have 'adjusted income' of more than £260,000 in a tax year will have their annual allowance for that tax year restricted. It is reduced, so that for every £2 of income they have over £260,000, their annual allowance is reduced by £1. Any resulting reduced annual allowance is rounded down to the nearest whole pound.
The maximum reduction is £30,000, so anyone with 'adjusted income' of £360,000 or more will have an annual allowance of £10,000. Individuals with high income caught by the restriction may have to reduce the contributions paid by them and/or their employers or pay an annual allowance charge.
However, the tapered reduction doesn't apply to anyone with 'threshold income' of £200,000 or less.
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.
Between 6 April 2020 and 5 April 2023, individuals who had adjusted income greater than £240,000 had their annual allowance restricted. It was reduced by £1 for every £2 of income they had over £240,000. The maximum reduction was £36,000, so anyone with income of £312,000 or more had an annual allowance of £4,000. The tapered reduction didn’t apply to anyone with threshold income of £200,000 or less for these tax years.
Between 6 April 2016, when the tapered reduction was introduced, and 5 April 2020, adjusted income was £150,000 and the maximum reduction was £30,000, so anyone with income of £210,000 or more had an annual allowance of £10,000. The tapered reduction didn’t apply to anyone with 'threshold income' of £110,000 or less for these tax years.
For an explanation of the difference between adjusted and threshold income, examples of process and the calculations 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.
When does the taper annual allowance apply?
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).
Worked examples on how to calculate threshold income and adjusted income.
|Tax year||Threshold income||Adjusted income2||Subject to taper? (Y/N)||Available annual allowance1|
1 For example, where the adjusted income limit is £260,000, the annual allowance is calculated as: £40,000 – ((adjusted income - £260,000) x ½).
2 Adjusted income threshold was £150,000 between 6 April 2016 and 5 April 2020 and £240,000 between 6 April 2020 and 5 April 2023.
Step 2 - using the template
Using the template below, calculate the carry forward available
|Tax year||Annual allowance||Total contributions||Carry forward available||Carry forward used||Carry forward remaining|
Let’s look at a worked example:
|Tax year||Annual allowance3||Total contributions4||Carry forward available||Carry forward used||Carry forward remaining|
3 Annual allowance figures in this example are based on the tapered annual allowance shown in the table earlier in this article.
4 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.
5 £6,000 of carry forward available in 2019/20 is used to cover the excess for the 2022/23 tax year.
6 The remaining £9,000 available will go unused and ceased to be available after 5 April 2023.
7 £11,000 of carry forward available in 2020/21 is used to cover the excess for the 2023/24 tax year.
8 The remaining £14,000 is available to cover any excess up to 5 April 2024.
9 £15,000 can be carried forward into the 2024/25 tax year if required. It could also have been used in the 2023/24 tax year, as could the £14,000 from 2020/21.
Things to remember
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.
How to calculate threshold income
An individual’s threshold income is found by taking the following steps:
- Start with the individual’s taxable income (including all earnings and investment income).
- ADD any employment income given up for pension contributions (such as a salary exchange arrangement) set up after 8 July 2015.
- DEDUCT the amount of any personal contribution (gross amount) made using relief at source or net pay arrangement.
- DEDUCT any taxed lump sum death benefits received.
An individual’s adjusted income is found by taking the following steps:
- Start with an individual’s taxable income (including all earnings and investment income).
- ADD the value of an any employer contributions. For money purchase this is the value of the contributions. 1. For defined benefits, this is the value of the pension accrued over the tax year and should be requested from the scheme trustees.
- DEDUCT any taxed lump sum death benefits received.
Worked example of threshold income
In 2023/24 Andy, an employee of Widgets Plc, has a salary of £270,000 and as a member of his employer’s scheme, pays 10% of his salary (£27,000) through a net pay arrangement. Andy’s employer pension input amount is also £27,000.
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 £2,100 subject to tax.
Andy also has a portfolio of shares that generated dividends of £3,500.
Step 1 – Andy’s net income is:
Employment income - £270,000
+Savings income - £2,100
+Dividend income - £3,500
Step 2 – Andy hasn’t entered into a salary exchange arrangement since 8 July 2015, so there is nothing to add at step 2 in respect of a relevant salary exchange arrangement.
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 = £27,000
= £275,600 - £3,600 - £27,000 = £245,000
Step 4 – Andy has received no taxed lump sum death benefits so there’s nothing to deduct.
Andy’s threshold income = £245,000.
As his threshold income is over £200,000, the tapered reduction may apply.
Worked example of adjusted income
Please refer to the threshold income example for the background information:
Step 1 – Andy’s net income is £275,600
Step 2 – ADD the employer contributions = £275,600 + £27,000 = £302,600
Step 3 – Andy has received no taxed lump sum death benefits so there’s nothing to deduct.
Andy’s adjusted income is £302,600.
The excess over the adjusted income limit is £42,600.
His annual allowance is therefore reduced by half of that - £21,300.
His annual allowance for the tax year is therefore £18,700.
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.
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.