14 February 2012

Pension legislation – carry forward

The annual amount individuals can invest in pensions and attract tax relief was sharply reduced, in April 2011, from £255,000 to £50,000. However, to help combat this reduction, we are now allowed go back a maximum of three tax years and pick-up any unused tax relief. This is called “carry forward”. Carry forward allows individuals to make a much larger pension contribution than the annual allowance in one tax year.

Individuals who earned more than £130,000 a year and were restricted by ‘anti-forestalling’ rules can also now go back and pick up unused relief on pension contributions up to £50,000 for each of the previous three tax years.

Carry forward and tax relief

If we are utilising carry forward for a client, the usual tax relief rules still apply to any contributions made.

Tax relief on employer contributions are subject to the “wholly and exclusively” test.

Tax relief on personal contributions is limited to 100% of the individual’s relevant UK earnings for the current tax year.

In order to use carry forward, a client must first use-up their current year’s annual allowance.

The easiest way of showing how carry forward would work in practice is through examples.

Example 1

Helen earns £85,000 pa and has already paid £50,000 to her SIPP to use-up the annual allowance for the current tax year, 2012/13. She now wishes to consider a larger pension contribution. First, we must identify her funding history and this is as follows:

Tax Year Pension input amount Unused allowance Cumulative carry forward
2009/10 £20,000 £30,000 £30,000
2010/11 £70,000 Nil £30,000
2011/12 £15,000 £35,000 £65,000

The key point to note is that although Helen’s contribution for 2010/11 exceeded the annual allowance by £20,000 this doesn’t use up any of her unused allowance from 09/10.

Helen could, therefore, add a further £65,000 to her pension. She decides to pay-in £35,000, bringing her total contribution to £85,000, including the £50,000 already made, for the current tax year. This is the largest pension contribution she can obtain tax relief on (without utilising Pension Input Periods).

Example 2

David has been a high earner in the past, earning in excess of £130,000, and was therefore caught by the anti-forestalling rules that I mentioned earlier. Under these rules, he was restricted to a maximum annual contribution of £20,000. He expects to have relevant income of £180,000 for the current tax year 2012/13 and wants to know how much of a pension contribution he could make whilst still obtaining tax relief.

David’s history of pension contributions for the previous three tax years and his carry forward calculation are as follows:

Tax Year Pension input amount Unused allowance Cumulative carry forward
2009/10 £100,000 Nil Nil
2010/11 £20,000 £30,000 £30,000
2011/12 £50,000 Nil £30,000

David’s contribution for 2009/10 was made before the second wave of anti-forestalling legislation came into place and therefore does not cause a problem.

The maximum contribution that David can make for the current tax year is £80,000 (£50,000 for the current annual allowance for 2012/13 and £30,000 from carry forward). However a further £50,000 could also be paid-in to his pension the following day, assuming that his input period had been closed and a new input period had been opened. This would mean that a total pension contribution of £130,000 over two days would be possible.

As you would expect with any piece of pension legislation, there are a number of different permutations and quirks to the rules which we have to consider when utilising carry forward.

Carry forward can be a valuable tax efficient tool in accelerating pension planning for clients. For more details, contact Mark Christie at

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