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If you save more than £50,000 in your pension you still might not have any annual allowance charge to pay. You can carry forward any annual allowance that you have not used from the previous three tax years to the current tax year. The amount of the unused annual allowance can then be added to this year's annual allowance. This gives you a higher amount of available annual allowance.
You must have been a member of a registered pension scheme to have an unused annual allowance to carry forward from an earlier year.
If your pension saving for the tax year is less than your available annual allowance there will be no annual allowance tax charge.
If your pension saving is more than your available annual allowance you will have to pay the annual allowance charge - but only on the amount over your available annual allowance. You will not need to contact HM Revenue & Customs (HMRC) to tell us that you have unused annual allowance that you want to use to set off against an annual allowance charge for a later year. This doesn't need to be included on your Self Assessment tax return.
There is a strict order in which you use up your annual allowance. You use the annual allowance in the current tax year first. You then use your unused annual allowance from earlier years, using the earliest tax year first.
If you have been a member of a registered pension scheme but, in one particular year, have not made pension savings for that year then you can carry forward an annual allowance of £50,000 from that year. If however, you have not been saving in a registered pension scheme then you will not have unused annual allowance to carry forward from that year.
Sybille has total pension savings of £65,000 for the 2011-12 tax year.
In the previous three tax years her pension savings were:
2010-11 - £35,000
2009-10 - £30,000
2008-09 - £25,000
If the annual allowance for each of those years was £50,000 Sybille has unused annual allowance of £25,000, £20,000 and £15,000 from those three tax years:
2010-11 - £15,000
2009-10 - £20,000
2008-09 - £25,000
£60,000
This means Sybille has £60,000 unused annual allowance to carry forward.
Together with the £50,000 annual allowance for the 2011-12 tax year Sybille can have pension saving of £110,000 without the annual allowance charge being due.
Sybille's pension saving for the 2011-12 tax year is less than her available annual allowance. She does not have to pay the annual allowance charge.
Sybille has used up the £50,000 annual allowance for the current tax year and £15,000 unused annual allowance from three years ago. Although she still has £10,000 unused annual allowance from three years ago she cannot carry this forward to the next tax year. You can only carry forward unused annual allowance from the last three years and next year the £10,000 unused amount will be from four years ago and so will be out of time and not available.
Sybille has £35,000 unused annual allowance that she can carry forward to next tax year. If the annual allowance in the next tax year is still £50,000 she will be able to making pension saving of £85,000 and still not have any annual allowance charge.
This three year carry forward rule allows you to make occasional large amount of pension savings without having to pay the annual allowance charge.
For example if you are self-employed and in one year make a large profit, you might be able to make a contribution to your pension scheme that is larger than normal and is above the standard annual allowance level. This depends, of course, on the amount of contributions that you have been paying over the previous three tax years and the amount of unused annual allowance that you can carry forward.
Raj is a self employed plumber. In the previous three years Raj has made contributions of £40,000, £20,000 and £30,000 to his pension arrangement. Raj has had a good trading year and wants to use part of his higher profits to increase his pension fund.
In the past three years Raj has not used all his £50,000 annual allowance. He has £60,000 unused annual allowance that he can carry forward to this tax year. Raj can make a contribution of £110,000 without having to pay the annual allowance charge.
If you are a member of a final salary scheme (this is a defined benefits arrangement) a large pay increase, for example because you were promoted, can make your pension saving amount a lot bigger than usual. The three year carry forward rule means that such a one-off increase in your pension saving is less likely to produce an annual allowance charge.
Rose is an NHS nurse and her pension scheme will provide a pension of 1/80th final pay for each year of service plus a lump sum of 3 x her pension. Her level of pay and length of service mean that her pension saving amount is normally between £8,000 and £9,000 each year.
Rose gets promoted to ward sister and as a result gets a £6,000 pay rise. Because of her large pay rise and because this means that her pension is based on this pay for all of her years of service, Rose's pension saving for this year is £55,000. This is more than the £50,000 annual allowance.
As Rose has not used all her annual allowance in the last three tax years she can carry forward her annual allowance. Rose has unused annual allowance of over £120,000 to carry forward. This means that Rose does not have any annual allowance charge on her unusually high pension savings of £55,000.
The amount of annual allowance for 2011-12 is lower than the annual allowance for previous tax years. Because of this there are special rules for working out how much annual allowance can be carried forward from the tax years 2008-09, 2009-10, and 2010-11. To work out how much unused annual allowance can be carried forward to 2011-12 and later tax years:
The method of working out if you have to pay an annual allowance charge, and how much, for the tax years 2008-09, 2009-10 and 2010-11 has not changed.
Graeme has a money purchase arrangement and a defined benefits arrangement. In 2011-12 Graeme has pension savings of £100,000. In the previous three tax years Graeme had the following pension savings:
2010-11 - £32,000
2009-10 - £30,000
2008-09 - £25,000
These pension savings were calculated using the pre 6 April 2011 method of valuing pension saving.
However, to find out whether there is any available unused annual allowance to carry forward, the pension savings need to be calculated using the post 6 April 2011 methods of valuing pension inputs. On this basis, Graeme's pension savings will be £38,000, £36,000 and £30,000.
So Graeme has £46,000 unused annual allowance that he can carry forward to 2011-12. This gives him a total available annual allowance of £96,000. This does not cover all of Graeme's pension saving and so the annual allowance tax charge is due on £4,000 pension saving over his available annual allowance.
You are able to carry forward unused annual allowance automatically. You do not need to make any claim to HMRC to carry forward unused annual allowance and you do not need to show this on your tax return if your unused annual allowance means that an annual allowance tax charge is not due.
For 2011-12 to see if you have any annual allowance charge you need to take the following steps:
If the answer is no, you do not have to pay the annual allowance charge. You do not need to carry out any more steps.
If the answer is yes, go to step 3.
If the answer is yes you do not have to pay the annual allowance charge. You do not need to contact HMRC to make a claim or election for this carry forward. However you will need to keep a record in case your pension savings exceed the annual allowance in a subsequent year.
If the answer is no the annual allowance charge is due on the amount of your pension saving that is more than your available annual allowance.
