HMRC Announces Changes to Pension Carry Forward Rules

Prior to the Chancellor, George Osborne’s recent Autumn Statement, a number of other important changes were announced. One of these was a revision to the pension carry forward rules.

Her Majesty’s Revenue & Customs (HMRC) has changed its guidance on how the carry forward of unused ‘deemed’ Annual Allowance works for tax years 2008/2009, 2009/2010 and 2010/2011. These are known as the ‘transitional years’ and the changes will impact all carry forward calculations involving these years.

Previously, where an individual has contributed, or had contributed on their behalf by an employer, an amount greater than £50,000 in a given tax year, this uses up any unused Annual Allowance from a previous year.

The result of these changes is that some people may have more unused Annual Allowance than they had previously and as a consequence could potentially contribute a greater amount to pension. Indeed, some individuals will now be able to utilise carry forward where previously they could not.

To best illustrate the effect of these changes, we should look at a simple example: –

George has pension inputs as follows: –

2008/2009 – £20,000
2009/2010 – £90,000
2010/2011 – £30,000

Prior to the recent announcement, George’s carry forward limit in 2011/2012 would have been £20,000 from 2010/2011. The £40,000 ‘excess’ in 2009/2010 would have wiped out the £30,000 otherwise available from 2008/2009.

As a consequence of the rule change, George’s carry forward limit in 2011/2012 has increased to £50,000, made up of £30,000 from 2008/2009 and £20,000 from 2010/2011. The £40,000 excess over the deemed Annual Allowance of £50,000 from 2009/2010 is now ignored.

Clients who are in a similar situation to George must act with some degree of haste. George can only use the £30,000 from 2008/2009 if he applies it to a pension input period ending in 2011/2012. It is essentially a ‘use it or lose it’ situation as any unused 2008/2009 deemed Annual Allowance must be used before the 2011/2012 tax year/pension input period ends.

If an individual’s pension input period has already ended in tax year 2011/2012, they can still take out a new arrangement with an input period that ends in 2011/2012. Then they could still make the most of this new opportunity

Please contact us if we can assist in this regard.