Explaining carry forward

You can normally put up to £40,000 (your annual allowance) into pension schemes, such as SIPPs, each year. This is subject to having suffcient earnings of at least this level. However, there is also the opportunity to invest more thanks to the ‘carry forward’ rule.

If you are a high earner your annual allowance may be lower than £40,000. For more information please see our Tapered Annual Allowance factsheet.

What is it?

Carry forward allows you to add any unused annual allowance from the previous three tax years to your current annual allowance, so you will generally receive tax relief on a much larger contribution. For the current tax year 6th April 2017 to 5th April 2018, it means you could potentially invest a gross amount of £160,000 (inclusive of basic rate tax relief) and receive as much as £72,000 in tax relief.

Please note that ‘unused annual allowance’ takes into account all the pension schemes you hold. It’s also important to remember that the value of tax savings depends on your personal circumstances and all tax rules may change in future. You cannot access your pensions before the age of 55.

If you have any defined benefit schemes and wish to use carry forward, you may want to speak to a financial adviser, as the calculations for unused allowance can be complex.

When doesn’t it apply?

Most importantly, you can only get tax relief using carry forward if you have earned the same amount, or more, in the current year as the sum you want to contribute to your pension. For example, if you want to invest £75,000 gross (inclusive of basic rate tax relief) in your pension you need to earn at least £75,000 gross.

In addition, you can’t use carry forward if you were not in a pension arrangement in the previous tax years. Effectively, it’s only available on annual allowance that you could have used, but haven’t.

Finally, you may not be able to use carry forward if you have started to take benefits from your money purchase pension under the new flexibility rules. In this situation, you may be subject to the Money Purchase Annual Allowance, which reduces the amount you can put aside each year to £4,000 and does not allow the option to carry forward.

How does it work?

To use carry forward, you must make the maximum allowable contribution in the current year (£40,000 for the 2017/18 tax year) first and then move on to the previous years’, starting with the tax year three years ago. If you’re using carry forward this year, it would mean any unused allowance from 2014/15, followed by 2015/16 and then the previous tax year.

Most recent annual allowanceContribution invested / madeUnused allowance

2014/15

£40,000

£5,000

£35,000

2015/16*

£40,000

£10,000

£30,000

2016/17

£40,000

£20,000

£20,000

Current tax year

£40,000

-

£40,000

Total allowance for this year, including carry forward

£125,000

*Special rules apply to the 2015/16 tax-year.

All figures shown are expressed as gross.

Carry forward depends on your Pension Input Amounts (PIAs) in your Pension Input Periods (PIPs). With effect from 6 April 2016 the PIP is the same as the tax year which runs from 6th April to 5th April in the following year. However, PIPs from previous years may not necessarily align with the tax year - if you are unsure, you can obtain PIA information by contacting your pension provider. To find out more, please download our carry forward factsheet.

You do not have to notify HMRC if you are using carry forward because basic rate tax relief will be applied automatically. You should keep full documentation of your carried forward calculation in case it is requested by HMRC or needed for your future reference.

Please note, if you are not eligible to receive tax relief on the amount you contribute you must inform us within 30 days from the date of the contribution. Higher and additional rate tax relief can generally be claimed through your self-assessment tax return. If you do not complete a self-assessment tax return, please contact the HMRC for further information.

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