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Can I Carry Forward Unused Pension Annual Allowance?

I’ve read that I can maximise my pension contributions this tax year by using something called pension carry forward. How does pension carry forward work and how much of my pension allowance can I carry over?

Question asked by Ms D Clayborne

Utilising Unused Pension Annual Allowance

Firstly, how much you can contribute to your pension in any given tax year and still get tax relief is known as the annual pension allowance.

The annual pension allowance is capped at a gross figure of the lower of 100% of your earnings or £40,000 for most people — that’s including HMRC’s contributions in the form of tax relief. To pay in the full £40,000 per year, you’d need to be earning at least £40,000.

While you can pay more into your pension than the maximum yearly cap, doing so leaves you open to a tax charge at your highest marginal rate on any payments above the threshold.

Tapered Annual Pension Allowance for High Earners

From April 2016, anyone earning £150,000 or more will see their annual pension allowance taper off by £1 for every £2 they earn above £150,000 (which includes pension contributions, bonuses, interest from savings and dividends etc.) This is subject to a maximum tapering of £30,000.

As such, anyone earning £210,000 or more from the 2016/17 tax year onwards has their yearly pension allowance tapered down to just £10,000.

What is Pension Carry Forward?

Pension carry forward lets you roll over unused annual pension relief from the past three tax years into the current tax year. So you effectively get to make up to four years of pension contributions in one year.

Below is a table of the yearly pension allowances from the three previous tax years. Assuming you’ve made no pension contributions at all in any of the past three tax years, you can carry through an additional pension allowance of £120,000 into 2016/17 and put this into your pension, on top of 2016/17’s allowance of up to £40,000.

Historic Annual Pension Allowances

Tax Year

Maximum Yearly Pension Allowance

2016/17

£40,000

2017/18

£40,000

2018/19

£40,000

However, you can only contribute 100% of your annual earnings into a pension in any one tax year. So to take full advantage of pension carry forward in 2019/20, you’d have to be earning at least £170,000.

And if you’ve consistently been earning £170,000 then because of the tapering of the yearly allowance this tax year for those earning over £150,000, your yearly pension allowance in 2016/17 onwards would be reduced to £30,000.

As such, the maximum annual pension contribution you could make in the 2016/17 tax year with a salary of £170,000 per annum would be £140,000.

This would be made up of:

  • £30,000 from 2016/17 (because of the tapered annual allowance)
  • £30,000 from 2017/18
  • £30,000 from 2018/19.

As you can see, it’s a fairly complicated area. Your pension contribution threshold for the 2019/20 tax year is now determined by your income, as well as how much you’ve contributed to your pension pot over the past 3 tax years.

Need Pensions Advice?

Without expert help it can be difficult to keep on top of your tax allowances and ensure you are maximising your pension contributions. If you need pension advice and help with your annual allowance then please do not hesitate to pop us a call on 02084327334 or email wealth@drewberry.co.uk.

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