Reducing the Annual Allowance to £50,000 will inadvertently catch some individuals who have one off spikes in pension accrual. For example, an individual may make sizable contributions because in one year they make a large profit or receive a large bonus. A member of an occupational pension scheme may find that they have breached the annual allowance as a consequence of a promotion that results in a pay rise. In recognition of this, from the tax year 2011/2012, the Government have introduced a three year carry forward rule. This rule allows individuals to make occasional large pension savings without incurring an annual allowance charge, by carrying forward any unused annual allowance from the pension input periods ending in the three previous tax years to the current year.

• In order to make use of unused annual allowance the individual must have been a member of a registered pension scheme at some point during the tax year they are carrying forward from. But it is not necessary for the individual to be an active member of the scheme in that year. Nor does the carry forward unused annual allowance have to be used in the same arrangement in which it originally arose.
• Annual Allowance is used up in a strict order. The annual allowance for the current year is used up first. Then the carry forward of unused annual allowance, using the earliest carry forward year first and so on.
• If one of the previous three years has an input amount of more than £50,000 then that excess is treated as using up any amount of available annual allowance from the preceding year(s) first and this will reduce the available annual allowance to be carried forward to the current year.
• However, the position for the tax years 2008/09, 2009/10 and 2010/11 is different. When the pension input is greater than £50,000 in 2009/10 and/or 2010/11 tax year this excess will not use up any amount of available annual allowance from a preceding year.

If the individual has used up all their annual allowance for the 2011/2012 tax year, they will be able to carry forward any unused annual allowance for the three previous tax years 2008/09, 2009/10 and 2010/11.

• For each year prior to 2011/12, it is assumed that the annual allowance was £50,000.
• If the pension input is greater than £50,000 in 2009/10 and/or 2010/11 this excess will not use up any amount of available annual allowance from a preceding year.
• Defined benefit accrual for those years (2008/09, 2009/10 and 2010/11) is calculated using the factor of 16, with the opening value increased by CPI for the September ending immediately before the tax year in question. The CPI figures to use are:

• For money purchase schemes. The pension input is the gross contribution paid by or on behalf of the individual, and by the employer of that individual.

We have produced a carry forward calculator for the 2011/12 tax year, which can be accessed here.

The calculation of carry forward to the tax year 2012/13 is the same as for 2011/12 except:

• Pension Input amounts in excess of £50,000 in the 2011/12 tax year will use up unused annual allowance carried forward from the preceding year(s).
• It is necessary to check whether a pension input value for 2011/12 in excess of £50,000 used up any carry forward from the tax year 2008/09 as this won’t use up unused annual allowance again in respect of the 2009/2010 and 2010/11 tax years.

The following examples assume that there was no carry forward in respect of the 2008/09 tax year, and that there were no Straddling Pension Input Periods (i.e. one that started prior to 14 October 2010 but ends in the 2011/12 tax year).

Example 2 and 3 illustrate how the excess contribution in 2011/12 uses up previous years unused annual allowance.

The following example assumes that the 2011/12 excess was justified by carry forward of unused annual allowance of £5,000 from the 2008/09 tax year.

This highlights the importance to check whether an excess input amount in a carry forward year was justified by unused annual allowance carried forward from a tax year that is no longer one of the current carry forward years. This check ensures that an individual’s carry forward calculation does not underestimate the amount of unused annual allowance available.

The following only applies where the 2011/12 input amount has been made into a straddling PIP. The situation can be complex.

• The amount of the 2011/12 unused annual allowance is the difference between £50,000 and the pension input amount made during the whole pension input period.
• A pension input in 2011/12 will use up previous years unused annual allowance to the extent that an annual allowance charge would have been incurred in the 2011/12 tax year. An annual allowance tax charge would have occurred if the pension input post 13 October 2010 to the end of the input period exceeded £50,000 and/or the total pension input over the whole pension input exceeded £255,000 (please refer to the transitional annual allowance section for further information)

Example 1: although the pension input in 2011/2012 exceeds £50,000 the excess does not use up any of the carry forward amount from the 2009/2010 tax year, because there was no annual allowance charge in respect of 2011/2012.

Example 2: although the total pension input in 2011/2012 was the same as in example 1, because there was an annual allowance charge of £10,000, in respect of the post 13/10/2010 period, the total carry forward amount is £0.