Carry Forward Print

Individuals can carry forward any Annual Allowance that has not been used from the previous three tax years to the current tax year. The amount of the unused Annual Allowance can then be added to the current year’s Annual Allowance.

Individuals must have been a member of a registered pension scheme to have an unused Annual Allowance to carry forward from an earlier year. If the individual has been a member of a registered pension scheme but, in one particular year, has not made pension savings for that year then the individual can carry forward the annual allowance from that year.

Individuals do not need to inform HM Revenue & Customs that they have any unused Annual Allowance that they want to use for a later year, and this does not need to be disclosed on the Self-Assessment tax return, although the relief for the additional premiums paid must be claimed in the normal way.

There is a strict order in which the unused Annual Allowance is used. The current tax year’s Annual Allowance is used first and then the unused Annual Allowance from earlier years, using the earliest tax year first.

Examples:

James has total pension savings of £65,000 for the 2018-19 tax year.

In the previous three tax years his pension savings were:

2017/18 £35,000
2016/17 £30,000
2015/16 £25,000

The annual allowance for 2015/16, 2016/17 and 2017/18 is £40,000. James has unused annual allowance of £15,000, £10,000 and £5,000 from those three tax years respectively so he has a total of £30,000 unused Annual Allowance to carry forward into the 2018/19 tax year.

The annual allowance for 2018/19 is £40,000, so James could make pension contributions of £70,000 without incurring the annual allowance charge, provided he has sufficient earnings to justify the contribution or that the contribution is made by his employer.

All contributions made by employers need to be justified under the “wholly and exclusively rule” to attract tax relief for the employer. Broadly this means that the pension contribution has to be incurred wholly and exclusively for the purposes of the company’s trade. The guidance provided to its Inspectors by HMRC is to establish the employer’s objective in making the payment. The guidance gives some examples of when HMRC considers that a pension contribution would not be for the purposes of the company’s trade, such as contributions made:

  • In respect of a controlling director or employee who is a close friend or relative of the controlling director or proprietor of the business;
  • As part of the arrangements for going out of business;
  • Where, as a question of fact, there was a non-trade purpose.

The point to bring home here is that employer pension contributions are likely to be scrutinised more closely by HMRC, and it should not be assumed that a pension contribution by a company will be automatically allowed as a deduction for the employer.

HMRC also has discretion to restrict tax relief on employer contributions viewed as excessive. The instructions in the HMRC manuals are to review cases where there is an increase of more than 210% in the level of employer contributions from one period to the next, and if appropriate for the relief to be spread over a number of years depending upon the increase. The guidance on this point is that if the increase is less than £500,000 there should be no spreading. Where the increase is over £500,000 this may be spread over the current year and the following 3 years, depending upon the size of the increased contribution.

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