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HMRC internal manual

Pensions Tax Manual

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HM Revenue & Customs
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Annual allowance: carry forward: calculating unused annual allowance

Glossary PTM000001
   

 

Total pension input amount does not exceed the annual allowance
Total pension input amount exceeds the annual allowance
Deemed pension input amount for certain defined benefits and cash balance arrangements
Available annual allowance and the total pension input amount for the relevant tax year
When the money purchase annual allowance applies
When the tapered annual allowance applies

Sections 228A, 228B and 228C Finance Act 2004

Unused annual allowance can be carried forward automatically and does not need to be notified by the individual to HMRC or the scheme administrator. An individual does not need to show this on their tax return if their unused annual allowance means that an annual allowance tax charge is not due for a particular tax year.

To see if an individual has an annual allowance charge, they need to take the following steps.

All individuals must work out their total pension input amount for the tax year.

Note – tax year 2015-16 is split into two ‘mini’ tax years for annual allowance purposes only, the pre and post-alignment tax years.  PTM058010 has more details.

The individual will need to add together the pension input amounts for all arrangements that they have under registered pension schemes, and relevant overseas schemes (see PTM051100 - ‘Who the annual allowance rules apply to’).

The calculation of the pension input amount will vary depending upon the type of arrangement. The following show how this is calculated in:

Note – tax year 2015-16 is split into two ‘mini’ tax years for annual allowance purposes only, the pre and post-alignment tax years, and there are modified calculations for defined benefits and cash balance arrangements (and for hybrid arrangements accordingly).  PTM058070 has more details.

Individuals who are subject to the money purchase annual allowance because of flexibly accessing a money purchase arrangement on or after 6 April 2015 will have to take an additional step. As well as working out their total pension input amount for the tax year, they will also have to work out their ‘money-purchase inputs’ and ‘other inputs’ for the tax year.

If a member’s pension input amount in a single scheme is more than the annual allowance for the tax year, the scheme administrator should automatically tell the member the total value of their pension input amount for all arrangements under that scheme over the pension input period ending in the tax year. A member can also ask their pension scheme to provide that information.

If a member’s ‘money-purchase input’ in a single scheme is more than £10,000 for the tax year and the scheme administrator of that scheme has reason to believe that the member is subject to the money purchase annual allowance, the scheme administrator should automatically tell the member the total value of their pension input amount for all arrangements under that scheme over the pension input period ending in the tax year. The information should set out both the member’s ‘money-purchase inputs’ and ‘other inputs’ (if any). A member can also ask their pension scheme to provide that information.

PTM167000 explains the scheme administrator’s responsibility to provide a member with information about their pension input amount.

Total pension input amount does not exceed the annual allowance

If the individual’s total pension input amount is less than the annual allowance and the individual is not subject to the money purchase annual allowance, the individual will not have to pay the annual allowance charge and there is no need to carry out any more steps.

If the total pension input amount exceeds the annual allowance, go to the next step.

Note - as well as the next step, individuals who are subject to the money purchase annual allowance will have to carry out additional steps (see When the money purchase annual allowance applies below). Also, such individuals might have an annual allowance charge even if their total pension input amount does not exceed the annual allowance.

Note – tax year 2015-16 is split into two ‘mini’ tax years for annual allowance purposes only, the pre and post-alignment tax years (PTM058010 has more details).  Typically individuals will have a nil annual allowance for the post-alignment tax year and so will need to go to the next step.

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Total pension input amount exceeds the annual allowance

Work out how much the total pension input amount was for each of the last three, or four, tax years.

Note – whether it is the last three or four tax years depends on the current tax year in question (see PTM055100). In the rest of this section the ‘previous tax years’  or ‘previous tax year set’ in relation to a current tax year means either the previous three tax years, or previous four tax years, as applicable to the current tax year in question.

If one or more of the previous tax years being considered is before 2011-12 then the post 6 April 2011 rules should be used to work out the pension input amount for these years. There is more information about valuing pre 6 April 2011 pension inputs at PTM055300.

Tax year 2015-16 is split into two ‘mini’ tax years for annual allowance purposes only, the pre and post-alignment tax years, and there are modified pension input amount calculations for defined benefits and cash balance arrangements (and for hybrid arrangements accordingly).  PTM058010 has more details.

A member can ask their scheme administrator to tell them the amount of their pension input amounts under that scheme for the last three tax years.

Work out how much unused annual allowance there is for the previous tax years.

If the total pension input amount in relation to one or more of the previous tax years (including, when applicable, any deemed pension input amount) is less than the annual allowance for that same tax year, there will be unused annual allowance for the tax year(s) concerned for potential carry forward to the current tax year. The unused amount is the difference between the total pension input amount and the annual allowance.

If one of the previous tax years has an input amount of more than the annual allowance for that tax year, then that excess may have used up any amount of unused annual allowance from the preceding year(s) in the same previous tax year set first. If so, this will reduce the amount of unused annual allowance to be carried forward to the current year. (See PTM055100 for more details about how unused annual allowance from more of the previous three tax years may have been used up when the annual allowance was also exceeded within the same three-year period.)

Add any remaining unused annual allowance to the annual allowance for the current year. This is the available annual allowance.

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Deemed pension input amount for certain defined benefits and cash balance arrangements

There is a deemed pension input amount in the case of certain defined benefits arrangements and cash balance arrangements or hybrid arrangements (where the only benefits that may be provided under the hybrid arrangement are defined benefit or cash balance benefits).

The deemed pension input amount must be included as part of the total pension input amount for one or more of the relevant last three tax years when determining how much unused annual allowance can be carried forward to any of the tax years 2011-12, 2012-13 and 2013-14.

The deemed pension input amount applies only for the purpose of establishing how much unused annual allowance might be available to carry forward. The deemed pension input amount does not form part of an individual’s actual total pension input amount that is tested against the annual allowance for a particular tax year.

The certain defined benefits and cash balance arrangements in question are those where:

  • there was a certain period of time during which the arrangement was in existence, but
  • during that period of time, the annual allowance provisions did not apply to the arrangement, and
  • the annual allowance provisions then started to apply to the arrangement as a result of the first pension input period for the arrangement ending in the tax year 2011-12, 2012-13 or 2013-14, and
  • in any one or more of the 3 consecutive periods of 12 months immediately before the commencement date of that first pension input period the arrangement was in existence at any time.

If the arrangement was in existence during any of those 12 month periods (the arrangement is likely to have been in existence at some time during, at least, the 12 month period ending immediately before the commencement date of the first pension input period), the 12 month period in question:

  • is a deemed pension input period,
  • the pension input period is for the tax year in which the 12 month period in question ended, and
  • a deemed pension input amount is calculated for that deemed pension input period.

The pension input amounts are calculated applying the changes introduced by Schedule 17 Finance Act 2011 but before the effect of The Finance Act 2004 (Registered Pension Schemes and Annual Allowance Charge) (Amendment) Order 2015 - SI 2015/80 (other than deeming the pension input periods to arise).

This provision is aimed at the first pension input period for the following arrangements in particular:

  • benefits to or in respect of the individual start to accrue again under an existing arrangement where the last such accrual had ceased before 6 April 2006 (more information see PTM052100), or
  • benefits to or in respect of the individual have continued to accrue since before 6 April 2011 under an existing arrangement, or start to accrue again on or after 6 April 2011 under an existing arrangement, where the individual has enhanced protection (see PTM052100).

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Available annual allowance and the total pension input amount for the relevant tax year

Money purchase annual allowance does not apply

If the individual’s total pension input amount does not exceed the individual’s available annual allowance, there will be no annual allowance charge.

Although there is no need to contact HMRC to make a claim or election when carrying forward unused annual allowance, the individual will need to keep a record in case their pension input amount exceeds the annual allowance in a subsequent year.

If the individual’s total pension input amount exceeds the individual’s available annual allowance, the annual allowance charge is due on the amount of the total pension input amount that is more than the available annual allowance.

Where the individual has an annual allowance charge, they will need to include this on their Self Assessment tax return.

If their pension input amount in one pension scheme is more than the annual allowance, e.g. £50,000 for 2011-12, and the amount of the annual allowance charge is more than £2,000 then the member can ask their scheme to pay the annual allowance charge for them. If they do this then their amount of pension benefits that they receive will be reduced to reflect the amount the pension scheme has paid on their behalf. This is known as “Scheme Pays”.

For more information about ‘Scheme Pays’, see PTM056400.

Money purchase annual allowance applies

An individual who is subject to the money purchase annual allowance might still have an annual allowance charge, even if their total pension input amount does not exceed their available annual allowance. For example, this might occur if the individual’s only pension input amount is a ‘money-purchase’ input which exceeds the money purchase annual allowance. See When the money purchase annual allowance applies below for more information.

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When the money purchase annual allowance applies

As well as determining whether their total pension input amount has exceeded the annual allowance or their available annual allowance, individuals who are subject to the money purchase annual allowance must also determine whether their ‘money-purchase’ inputs have exceeded the money purchase annual allowance for such inputs.

If the money purchase annual allowance has been exceeded, the individual must determine how much of their ‘other inputs’ (if any) have exceeded the alternative annual allowance.

If the ‘other inputs’ exceed the alternative annual allowance, any available unused annual allowance from the previous tax years is added to the alternative annual allowance to give the individual’s available alternative annual allowance.

The amount of the ‘other inputs’ over the individual’s available alternative annual allowance (if any) is added to the amount of the ‘money purchase’ inputs that is over the money purchase annual allowance to give an amount that is chargeable to the annual allowance charge (‘chargeable amount 1’, or ‘alternative chargeable amount’).

The individual must then compare chargeable amount 1 with the amount of the individual’s total pension input amount that is over the individual’s available annual allowance (‘chargeable amount 2’, or ‘default chargeable amount’).

If chargeable amount 1 is greater than chargeable amount 2, the individual’s annual allowance charge is based on chargeable amount 1 and they will need to include this on their Self Assessment tax return.

Otherwise the individual’s annual allowance charge will be based on chargeable amount 2 (if any). If there is such a chargeable amount, they will need to include this on their Self Assessment tax return.

If their pension input amount in one pension scheme is more than the annual allowance, e.g. £40,000 for 2015-16, and the amount of the annual allowance charge is based on chargeable amount 1, the individual can ask their scheme to pay the annual allowance charge for them only if the individual’s annual allowance charge would have been more than £2,000 when based on chargeable amount 2. If the individual can do this then their amount of pension benefits that they receive will be reduced to reflect the amount the pension scheme has paid on their behalf.

For more information about ‘Scheme Pays’, see PTM056400.

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When the tapered annual allowance applies

For tax year 2016-17 onwards an individual could be subject to the tapered annual allowance for a particular tax year.  Also, an individual could be subject to both the tapered annual allowance and money purchase annual allowance for a particular tax year.

The guidance on this page applies in the same way for an individual who is subject to the tapered annual allowance except that relevant references to annual allowance should be replaced with the individual’s reduced annual allowance and, if applicable, relevant references to alternative annual allowance replaced with the individual’s reduced alternative annual allowance.

PTM057100 has more details about the tapered annual allowance.