You can carry forward unused allowance from up to three tax years, so when looking at a year where contributions will exceed the AA, any unused allowances from the three previous tax years can be brought forward to cover (or reduce) the excess.
This enables someone who did not have the available funds or the earnings in that earlier year to carry forward the unused amount to a year when their circumstances are different.
The use of carry forward is subject to several conditions.
- Carry forward can only be used after the current year's AA has been fully used up.
- Unused allowance can be brought forward to the current tax year from the previous three tax years – starting with the earliest year first.
- The person had to have been a member of a registered pension scheme at some point during the carry forward year in question. There is no need for any contributions to have been made to the scheme in that year, so 'membership' includes deferred or paid-up members and pensioner members where the scheme is paying a pension directly to them.
- Those who have triggered the MPAA can no longer use carry forward for money purchase (DC) arrangements.
There are some further points to be aware of.
For high income clients, you will need to work out any TAA limit before you can calculate available carry forward of unused AA. Where a TAA applies in a tax year, it is only the unused TAA amount that can be carried forward from that tax year.
When looking back, if the AA was exceeded in any of the past three tax years, then a carry forward exercise would need to have occurred in that particular year to avoid an AA charge.
This may have been documented at the time, but to make sure that the correct amount of unused allowance is calculated for the current year, it may be necessary to look back three years prior to the year of that overpayment.
Valuing pension savings for the AA
To assess the amount of AA used, the level of pension savings must be measured.
Pension savings are known as the pension input amount and the duration this is measured over is the pension input period (PIP).
All PIPs are now aligned to the tax year.
Before 2016-17, PIPs were specific to each individual member of a pension scheme and could have run differently from the tax year.
PIPs could have spanned different periods and each pension scheme that an individual was an active member of could have its own specific period.
In fact, PIPs were set at arrangement level and a pension scheme could have multiple arrangements, each with different PIPs.
If any of your calculations need to go back before April 2016 then you will need to understand these more complex rules.
Pension input amounts
DC schemes
This is the total of contributions from all sources made within the input period. This includes personal contributions, employer contributions, and third-party payments.
These amounts form part of the pension input amount regardless of whether the payers received any tax relief on the contributions.
DB schemes
The input amount is the capitalised value of the increase in the DB benefits over the input period, using a factor of 16:1.
The input amount is calculated by subtracting the opening value of the benefits from the closing value.
