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Carry forward: What to consider for employed clients

21 January 2020

The benefits of topping up clients’ pension contributions with unused allowances from previous years are often overlooked. Here we look at employee contributions...

Man using keyboard

With the end of the tax year looming, it’s time to ensure all clients’ available allowances are used, where possible. And carry forward allows unused pensions annual allowance to be brought forward from the three previous tax years.

Three 'carry forward' groups to consider

Though every client would benefit from making use of the annual allowance and carry forward rules, there are three main groups to consider:

  1. Those affected by the child benefit tax charge;
  2. Those affected by the loss of their personal allowance;
  3. and those affected by the tapered annual allowance.

For clients hit with the child benefit tax charge – which affects households where anyone earns more than £50,000 – it may be worth reducing their ‘adjusted net income’ via a personal pension contribution in a bid to restore some or all of their child benefit.

The same tactic can be used with clients whose personal allowance has been cut because their ‘adjusted net income’ is over £100,000 (the reduction is £1 for every £2 their ‘adjusted net income’ climbs above £100,000).

Finally, it’s worth considering what is possible for those very high earners affected by the tapered annual allowance. These are clients whose annual allowance is reduced if both their ‘adjusted income’ (note this is different from ‘adjusted net income’) and their ‘threshold income’ exceed £150,000 and £110,000 respectively.

Carry forward case study #1: Geoff's bonus

Geoff is employed and a member of a money purchase pension scheme. He received a significant bonus and long service award from his company in 2019/20, pushing his earnings over £100,000 for the year.

He and his employer have been making regular contributions to the pension for many years, and Geoff made a one-off contribution of £20,000 in 2016/17.

(Note the 2015/16 tax year was split into two mini tax years for the purposes of the annual allowance as part of transitional rules announced in the Budget – we include it here for clarity).

Tax year  Standard annual alowance   Employer contribution (10% basic salary)  Personal contribution (5% basic salary)   Carry forward   Total annual allowance available (incl. carry forward) after in-year contribution
 2016/17  £40,000  £6,075  £23,038*  £10,887  £10,887
 2017/18  £40,000  £8,500  £4,250  £27,250  £38,137
 2018/19  £40,000  £8,750  £4,375  £26,875  £65,012
 2019/20   £40,000   £9,000  £4,500  £26,500  £91,512

*Includes one-off contribution of £20,000

After Geoff and his employer have paid their usual ongoing contributions for this tax year he will still have £91,512 annual allowance available, including carry forward.

Geoff’s earnings including his bonus and long service award totalled £118,000, so he could in theory fully use his available annual allowance, although it would leave significantly less to live on than he is used to.

Geoff wants to reinstate his personal allowance and make good use of his annual allowance.

To make sure he doesn’t lose any of his annual allowance from 2016/17, he needs to contribute at least £37,387 more this year, gross. This includes the remainder of the 2018/19 annual allowance of £26,500, plus the residual 2016/17 annual allowance of £10,887.

The annual allowance from 2017/18 and 2018/19 will still be available in 2020/21 for him to use should he wish to make contributions above his 2020/21 annual allowance. 

Geoff will also have entirely reinstated his personal allowance for the tax year because his ‘adjusted net income’ will now be below £100,000. This means an effective tax saving of 60% on the £18,000 that was previously over the £100,000. 

Carry forward case study #2: Tapered annual allowance

Let’s look at the impact of the tapered annual allowance on the level of contributions that can be carried forward.

In this example we have assumed the client is always subject to the tapered annual allowance.

 Tax year  Adjusted income   Tapered annual allowance   Gross personal contribution   Total annual allowance available (incl. carry forward) after in-year contribution 
 2016/17  £180,000  £25,000  £5,000  £20,000
 2017/18  £230,000  £10,000  £10,000  £20,000
 2018/19  £170,000  £30,000  £10,000  £40,000
 2019/20*   £170,000   £30,000  -  £70,000

* Before any 2019/20 contribution

However, should the client use the full £75,000 annual allowance available, including carry forward of £40,000, they would actually regain the full £40,000 annual allowance for 2019/20, and so would have an additional annual allowance of £10,000 to use either immediately or, indirectly, to carry forward to future years.

Carry forward hints and tips

  1. Work from accurate figures – don’t guess anything
  2. Always request a pensions savings statement
  3. Get full details of income for tapered annual allowance calculations, including salary; bonus; dividends; rental profit; and savings income
  4. Always double check tapered annual allowance calculations before and after planning contributions
  5. Use appropriate calculators  - such as this one from HMRC - for carry forward (and fully document all calculations in your client files)

Carry forward rules

Carry forward rules allow unused annual allowance to be carried forward from the three previous tax years. The key points of carry forward (covering both employee and employer contributions) are:

  1. The individual must have been a member of a registered pension scheme in the tax year from which the unused annual allowance is carried forward. There is no requirement for the member to have paid any contributions or had benefit accrual during those years.
  2. The annual allowance in the current tax year must be used first before utilising carry forward from previous years.
  3. The earliest available unused annual allowance (of the three previous tax years) must be used first.
  4. Any contribution for carry forward does not need to be made to the same registered pension scheme that an individual was a member of in the previous years.
  5. Personal contributions need to be within 100% of the individual’s relevant UK earnings for tax relief purposes in the actual year the contribution is paid.
  6. Employer contributions can also be used for carry forward and are therefore subject to the annual allowance. These contributions will be subject to the HMRC ‘wholly and exclusively’ rules for corporation tax relief purposes.
  7. Carry forward is not available for DC contributions if the money purchase annual allowance has been triggered, e.g. by drawing an UFPLS.

How can the Zurich Intermediary Platform help?

Topping up a client’s Retirement Account is both straightforward and can all be carried out online. As the client already has a pension arrangement on the platform, there is no need to obtain further signatures when the ongoing adviser charge is being maintained at the current level.

There are no additional platform costs associated with this tax planning exercise and the contributions (including pension relief at source) are all pre-funded, making sure your clients’ money is working for them as quickly as possible.

As we approach the tax year end, timing is important to ensure the transactions are completed on time. We have also published a schedule of platform deadlines for the 2019/20 tax year to help.

Find out more about the Zurich Intermediary Platform

The tax position will depend on the personal circumstances of the investor and tax rules may change in the future.

For use by professional financial advisers only. No other person should rely on or act on any information in this article when making an investment decision. This article has not been approved for use with clients.

Zurich is a trading name of Sterling ISA Managers Limited. Sterling ISA Managers Limited is registered in England and Wales under company number 02395416. Registered Office: The Grange, Bishops Cleeve, Cheltenham, GL52 8XX.

Zurich Intermediary Group Limited. Registered in England and Wales under company number 01909111. Registered Office: The Grange, Bishops Cleeve, Cheltenham, GL52 8XX.

This article was last reviewed in January 2020