What is carry forward of unused pension annual allowance?

Here is a comprehensive explanation of the carry forward of unused pension annual allowance:

What the Law Says

The core rule — Finance Act 2004, s.228A

Where an individual has unused annual allowance available for the current tax year, the annual allowance for that year is treated as increased by the amount of the unused annual allowance available.

An individual has unused annual allowance available for the current tax year if:

• (a) the annual allowance for the immediately preceding tax year exceeded their total pension input amount for that year; or
• (b) the annual allowance for either or both of the two tax years immediately preceding that exceeded the total pension input amount for those years, and the excess has not been "used up".

Membership requirement: Carry forward does not apply in relation to a preceding tax year unless the individual was a member of a registered pension scheme at some time during that year. However, if the individual was a member but had a nil pension input amount, the full annual allowance for that year is available to carry forward.

"Used up" rule: An excess from an earlier year is "used up" if, in an intervening tax year, the total pension input amount exceeded the annual allowance and the excess had effect to reduce or eliminate the annual allowance charge for that intervening year. Where excesses from different years are used up, the excess from the earlier tax year is taken to have done so first.

Money purchase annual allowance (MPAA) interaction (s.228A(8)): Where the chargeable amount for a preceding tax year was the alternative chargeable amount (i.e. the MPAA applied), references to the "annual allowance" and "total pension input amount" are replaced by references to the alternative annual allowance and the defined-benefit input sub-total respectively.

Special rules for 2015-16 (s.228C): Tax year 2015-16 is split into a "pre-alignment tax year" (6 April–8 July 2015) and a "post-alignment tax year" (9 July 2015–5 April 2016). Carry forward from the pre-alignment tax year is capped at £40,000 (or £30,000 if the alternative chargeable amount applied). Where an individual was a member of a registered pension scheme during the pre-alignment tax year, the annual allowance for the post-alignment tax year is nil, so no unused allowance can be carried forward from it.

HMRC Guidance / Practice

General operation

From tax year 2011-12 onwards, if an individual's total pension input amount exceeds the annual allowance, they may still avoid an annual allowance charge by carrying forward available unused annual allowance from the previous three tax years and adding it to the current year's annual allowance. The combined figure is referred to as the individual's "available annual allowance".

Membership condition in practice

To carry forward from a previous tax year, the individual must have been a member of a registered pension scheme (active, pensioner, deferred or pension credit member) at some point in that year. If they had no pension input amount at all in that year, they can carry forward the full annual allowance for that year.

Historical annual allowance figures used for carry forward

Interaction with the tapered annual allowance

Where the tapered annual allowance applied in a previous tax year, the amount available to carry forward is calculated by reference to the individual's reduced (tapered) annual allowance for that year, not the standard annual allowance.

Interaction with the money purchase annual allowance (MPAA)

Where the MPAA applies to an individual in the current tax year, carried-forward unused annual allowance is added to their alternative annual allowance (not the standard annual allowance). Critically, carry forward cannot be used to reduce the tax charge on money purchase pension inputs when the MPAA applies.

Practical example of how carry forward works

HMRC illustrates the rule with the following example: Sybille has pension inputs of £65,000 in 2014-15 against a £40,000 annual allowance. Her unused allowances from the previous three years total £62,000 (£15,000 + £20,000 + £27,000), giving her an available annual allowance of £102,000. Her £65,000 input is below this, so no charge arises. The oldest year's unused allowance is used first; any remainder from that oldest year cannot be carried forward to the next year as it falls outside the three-year window.

Non-UK pension schemes

A member of a currently-relieved non-UK pension scheme can also carry forward unused annual allowance if, in the relevant previous years, they were a member of a registered pension scheme or another overseas pension scheme in respect of which they received UK tax relief.