The importance of correctly calculating pension carry forward
With the end of the 2021/22 tax year just around the corner on 5 April, you may be looking at any remaining ways you might have to make the most of your money.
One such method you may be considering is “pension carry forward”, allowing you to maximise the amount of tax relief you receive on your pension contributions.
We’ll handle these tricky calculations on your behalf at Britannic Place, so, by working with us, you’ll never need to worry as to whether you’ve got them correct.
Even so, it’s worth knowing what pension carry forward is, how it works, and how we’ll calculate it to help you give your pension savings a boost.
Read on to find out what you need to know.
Making the most of unused pension Annual Allowance
Firstly, it’s important to understand how pension carry forward works.
Pension carry forward involves making the most of your pension Annual Allowance from previous tax years.
The Annual Allowance is the limit for how much you can contribute to your pension while still receiving tax relief. In the 2021/22 tax year, for most people this is up to £40,000 or 100% of your earnings, whichever is lower.
If you don’t use the whole of your Annual Allowance in a single tax year, you can carry forward the remaining amount for up to three years.
That means, in the 2021/22 tax year, you can make pension contributions and receive tax relief on them by maximising unused Annual Allowance from as far back as the 2018/19 tax year – provided that you have any remaining Allowance that you didn’t use at the time.
For personal contributions you must earn at least the amount you wish to contribute
One important rule to bear in mind is that, to receive tax relief on personal contributions using previous years’ Annual Allowance, you must earn at least the amount you want to contribute in the same tax year that you’re making the contribution.
For example, if you want to make a personal contribution and receive tax relief on £100,000 of Annual Allowance from the past three tax years, your earnings in the current tax year must be at least £100,000.
However, please note that employer pension contributions are not limited to your earnings in any tax year and, so, there may be greater scope with making these than personal contributions. Please ask us if you would like to discuss this further.
Use this year first – and then start from the earliest year
When calculating carry forward, you must start with the current tax year’s Annual Allowance first. Once you’ve made the maximum contribution, you must then go back to the earliest year with remaining Annual Allowance and work forwards from there.
All your contributions count, including from your employer
You need to remember to include all contributions to your pension when working out whether you have any allowance left. This includes employer contributions and any other third-party contributions you may have received.
This is important to calculate accurately, as it could directly affect the amount of allowance you have left from previous tax years.
Beware the Tapered Annual Allowance and the Money Purchase Annual Allowance
As part of your carry forward calculations, you may also need to factor in the Tapered Annual Allowance and the Money Purchase Annual Allowance if you’re affected by these thresholds.
Tapered Annual Allowance
If you’re a high earner, the Tapered Annual Allowance can reduce the amount you can receive tax relief on. This comes into effect if both of the following are true for you:
- Your threshold income (i.e., excluding pension contributions) is more than £200,000
- Your adjusted income (i.e., including pension contributions) is more than £240,000.
Should you exceed both these thresholds, your Annual Allowance will be reduced by £1 for every £2 your adjusted income exceeds £240,000, down to a minimum of £4,000.
If this affects you, you’ll need to work out unused Annual Allowance against your tapered amount for each tax year you’re carrying allowance forward. This can be complicated, so speak to us if you’d like to find out more.
Money Purchase Annual Allowance
The Money Purchase Annual Allowance (MPAA) comes into effect if you’ve started to flexibly draw money from your pension above the 25% tax-free lump sum.
In this event, your Annual Allowance is reduced. In the 2021/22 tax year, the MPAA is 100% of your earnings or £4,000, whichever is lower.
Triggering the MPAA means you won’t be able to use pension carry forward to make contributions that exceed your Annual Allowance in the current tax year.
The MPAA only affects defined contribution (DC) pension schemes, not defined benefit (DB) schemes. Speak to us if you have a DB scheme, as you may still be able to use carry forward, depending on your circumstances.
Work with us
If you’d like to speak to an experienced financial planner to help you manage your pension carry forward or any other aspect of your money, please get in touch.
Email firstname.lastname@example.org or call 01905 419890 to find out more.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension contributions and withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.