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Carry forward: What to consider for employed clients

28 January 2019

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 of course). And carry forward allows unused pensions annual allowance to be brought forward from the three previous tax years.

Three main '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: those affected by the child benefit tax charge; those affected by the loss of their personal allowance; 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 2018/19, 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 he paid his bonus of £20,000 into his pension in 2015/16.

(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 carry forward remaining
 2015/16 (pre-alignment)  £80,000*  £2,025  £1,012  -  -
 2015/16 (post-alignment)  £40,000*  £6,075  £23,038  £10,887  £10,887
 2016/17  £40,000  £8,500  £4,250  £27,250  £38,137
 2017/18  £40,000  £8,750  £4,375  £26,875  £65,012
 2018/19  £40,000  £9,000  £4,500  £26,500  £91,512

* Post-alignment annual allowance is the residual of the pre-alignment annual allowance up to a maximum of £40,000. All amounts gross.

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 2015/16, 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 and the residual annual allowance from 2015/16.

The annual allowance from 2016/17 and 2017/18 will still be available in 2019/20 for him to use should he again require it. 

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   Carry forward 
 2015/16 (pre-alignment)  n/a*  £80,000*  £5,000  -
 2015/16 (post-alignment)  n/a*  £40,000*  £5,000  £35,000
 2016/17  £230,000  £10,000  £10,000  Nil
 2017/18  £170,000  £30,000  £10,000  £20,000
 2018/19  £170,000  £30,000  £10,000  £20,000

The tapered annual allowance came into force on 6/4/16.

* Post-alignment annual allowance is the residual of the pre-alignment annual allowance up to a maximum of £40,000. All figures gross.

However, should the client use the full £75,000 annual allowance available, including carry forward, they would actually regain the full £40,000 annual allowance for 2018/19, and so would have an additional annual allowance of £10,000 to use either immediately, or 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 - try here - for carry forward (and fully document all calculations in your client files)

Want more information?

Take a look at our matter-of-fact documents on carry forward, and on pension input periods and the annual allowance.

The information in these documents was correct at the time this article was published (see top).