There are numerous trip hazards with carry forward but more clients will want to be looking at it
Many believe the annual allowance will be fair game for the chancellor soon, as one of the least painful and least complex reductions in cost to the Treasury. As such, the need to contribute while clients can and maximise carry forward has come to the fore.
There are numerous trip hazards with carry forward, so let’s start with the basics. The client must be a member of a registered pension scheme in the tax year from which any carry forward is to be claimed.
It is the unused allowance that is carried forward, then tax relief is granted in the tax year in which payment is made. If the pension contributions are to be personal, the client must have enough net relevant earnings for the tax year to cover the intended total personal contributions.
If the pension contributions are to be corporate, they should meet the wholly and exclusively for the purpose of the business test for corporation tax relief to be granted.
The next step is to determine the client’s annual allowance in the current tax year. Firstly, check no events have triggered the money purchase annual allowance. If it has, contributions will be limited to £4,000 a year and the client cannot carry forward any unused MPAA.
Secondly, determine whether both the client’s threshold income exceeds £110,000 and their adjusted annual income exceeds £150,000. If this is the case, they
will have a tapered annual allowance for that tax year.
Remember any intended corporate contribution for the current year’s annual allowance or for any carried forward allowances is added to
the client’s adjusted annual income, potentially reducing their current allowance.
Carry forward is only available from the three immediately preceding tax years, starting with the earliest.
So, for tax year 2017/18, after first using up that year’s allowance, the earliest will be 2014/15 and once that has been used, further unused allowance can be carried forward from the tax year 2015/16, then 2016/17. Failure to utilise any unused allowance from the tax year 2014/15 before 6 April will see the allowance drop out of the equation.
Remember also that the 2015/16 tax year was the year in which HM Revenue & Customs aligned pension input periods with the tax year and, depending on dates paid, contributions in that tax year may affect the carry forward allowance.
2016/17 was also the first tax year in which the tapered annual allowance was introduced, so the client’s threshold and adjusted annual incomes for that year will
be needed to determine the amount of unused allowance available to carry forward.
Even if your clients are not making full use of the annual allowance this year, it would be wise to request and record their total income, from all sources, so you are able to field enquiries about carry forward in the future. It would also be prudent to collect contribution details, both personal and corporate, for all the client’s schemes.
Martin Tilley is director of technical services at Dentons Pension Management