Clients who have been paying into a pension can back-date some of their unused tax-free annual allowance, known as carry forward.
Carry forward is a useful tool for clients whose financial circumstances may have changed in the past three years.
Clare Moffat, pensions and legal expert at Royal London, says the run up to the new tax year, which begins on April 6, tends to prompt more enquiries from advisers around the issue of carry forward.
She says: “With the annual allowance increased in the last Budget, carry forward should be considered when reviewing a client’s pension plan.”
Examples of clients who might be helped by carry forward include:
- Self-employed clients who are able to back-date pension contributions; for example their profits may have been high but their business was relatively new so they chose to re-invest rather than pay more into their pension.
- Women who want to make up their pension contributions after taking time out of work to look after young children.
- Clients nearing retirement who might have paid off a mortgage or large debt and who can now afford to maximise their annual allowance.
- A client who has inherited a lump sum and wants to use it to boost their pension pot.
What is carry forward?
Carry forward allows clients to backdate any unused annual allowance from the previous three tax years.
Clients need to have been in a UK-registered pension scheme during those three years.
Eligible schemes include a defined contribution scheme, or a defined benefit pension scheme and/or a pension credit member, the latter applies to a sharing or earmarking order of an ex-partner’s pension.
The client will also need to have used all their annual allowance in the tax year they want to make use of carry forward, so they will have contributed their full annual allowance for the tax year 2023-24.
Only then can they back-date it to the previous three years.
To receive tax relief the client must have also earned the amount they wish to contribute.
So if the client wants to back-date pension contributions three years to the tax year 2020-21 and was on earnings of £40,000 that year, they would only get tax relief on £40,000 for that tax year.
If the client puts in more than their total annual allowance then they will be made to pay an annual allowance charge.
How does the annual allowance work?
The annual allowance is the amount a client can pay into their pension within a tax year – from April 6 until April 5 the following year – and get tax relief.
The most anyone can pay into a pension, using carry forward, is £60,000 a year, but this only applies to a client who has earned £60,000 or more. A different annual allowance threshold applies to previous years, which will be explained later.
Clients on large salaries may also be affected by the lifetime allowance and have their annual allowance tapered.
Clients can choose to pay more into their pension, but they will not get tax relief on the amount above their annual allowance.
Moffat said: “If your earnings are lower than £60,000 you'll be entitled to tax relief only up to the amount you earn.”
On the lower end, clients who earn less than £3,600 a year can pay in up to £2,880 over the past few years and still get tax relief.
