Liberty SIPP

• Sign up

The three year carry forward rule

On the 14th October the Government announced plans to change the annual allowance for tax relief on pension savings to £50,000. With this change came a three year carry forward rule which lets the individuals roll over their annual allowance over a period of 3 years. It is a simple rule which came as a slight bonus with the annual allowance being cut so dramatically. The new rule seems to favour those individuals who have a variable income and cannot make structured pension contributions every year.

So from the 6th April 2012 these new changes will be in place and you will be able to use the carry forward rule going back to the tax year 2008/09. If you contributed more than £50,000 in any of the 3 earlier tax years you will not be able to carry any forward, however you will not pay any additional tax in the tax years 2008/09, 2009/10 and 2010/11. If you contributed less than £50,000 then you can carry forward £50,000 minus your pension contributions for that year.

So say you contributed £20,000, you would be able to carry forward £30,000. If you do not contribute anything into a pension during a tax year you will not be able to carry anything forward for that year.

You will have to use your annual allowance up in a stringent order, using your allowance for the current tax year first, followed by the previous 3 years starting with the earliest. The following examples below will help explain the rule further;

Example – Mr Liberty (2011/12)

Using the above table, Mr Liberty in the tax year 2011/12, will firstly be able to use up his £50,000 annual allowance for that year. If he uses his maximum allowance for 2011/12 (£50,000) he will be able to use unused allowances for previous years. He can contribute an extra £15,000 + £30,000 + £40,000 = £85,000 for the tax year 2011/2012. In conclusion Mr Liberty in 2011/12 can contribute £135,000 tax free and any contribution over this amount will be taxed at Mr Liberty’s marginal rate.

Example – Mr Liberty (2012/13)

If Mr Liberty contributed nothing into a pension in 2011/12 lets see what happens to his annual allowance in 2012/13.

Mr Liberty will have his £50,000 annual allowance for 2012/13 and he will be able to carry forward £70,000 from 2009/10 and 2010/11. As you can see, because he has not contributed anything in 2011/12, he cannot carry anything forward from that year. Therefore Mr Liberty will have a total annual allowance of £120,000 for the tax year 2012/13.

The above example shows how the pension annual allowance may start to be used like an ISA allowance, in that you must take advantage of your allowance every year so that you don’t lose out.

Matthew Rankine

Nov 16, 2010