What Is Carry Forward?
Carry forward is a powerful pension planning tool that allows you to make pension contributions exceeding the standard annual limit by using any unused pension allowance from previous years. It’s a tax-efficient way to extract profits from your business while boosting your retirement savings.
Carry forward allows you to fill in pension contribution gaps from the last three years, provided you were a member of a pension scheme during those years (even if you weren’t contributing to the pension over that time).
This could mean contributing up to £220,000 into your pension this tax year, which is especially useful for business owners with variable income or profits.
For business owners, carry forward offers a way to make pension contributions through your company as an allowable business expense (providing it meets the “wholly and exclusively” test). It is important to check this with your accountant first.
If it is agreed that it is available and allowable, this can reduce your corporation tax bill while building up your pension pot. Even if you’re an employed individual, you can still benefit from carry forward, but it’s often easier to manage and calculate as a business owner.
How To Use Carry Forward
Membership Requirement: You must have been a member of a pension scheme in each tax year you wish to carry forward from. (gov.uk)
Contribution Cap: For employee contributions, your total pension contributions cannot exceed your current year’s earnings. (pensionbee.com)
However, for Employer contributions, these are unlinked to your earnings this tax year (but you still have to consider if your annual allowance is tapered in the current tax year or indeed previous tax years due to your total earnings).
To clarify: “employee contributions” (i.e., personal contributions you make) are restricted to 100% of your relevant UK earnings, such as salary, bonuses, and commission, and exclude dividends. “Employer contributions,” such as those made from your company into your pension, are not linked to your personal income, but they must meet the “wholly and exclusively” test to qualify as a business expense. Employer contributions do not attract personal income tax relief, but they do reduce corporation tax.
What This Means In Practice
Take a straightforward employee, earning £80,000 salary, and pays £10,000 already into a Pension including Employer and Employee contributions. Their total available allowance this year is a further £50,000 meaning in theory their availability to use carry forward for previous years is just £20,000. This is because paying £60,000 into a pension this year, and £20,000 as carry forward matches their total income this year of £80,000.
For a Company Owner (and Director), carry forward is more flexible.
In this example, the Company Director is paid £10,000 in salary and £70,000 in dividends. The company decides to make an Employer contribution of £100,000, reflecting a full use of this year’s annual allowance, plus an element of carry forward. Their accountant agrees it passes the “wholly and exclusively” test.
In this example, the individual is not restricted to just £10,000 of pension contributions (gross) as one might be as a straightforward employee. It is important to remember also that as a Director of your firm, you are deemed an employee automatically, therefore you don’t have to take a salary from the company in order to still benefit from an Employer contribution. Although the director only earns £10,000 in salary (and £70,000 in dividends), they can only make personal contributions up to £10,000 due to the relevant earnings rule. However, their company can make a significantly larger employer contribution, like £100,000, as long as it satisfies the business purpose test. This distinction between linked and unlinked contributions is what gives directors much more flexibility in how they use carry forward.
But Beware:
MPAA Trap: If you’ve flexibly accessed your pension savings, the Money Purchase Annual Allowance (MPAA) may apply, reducing your contribution limit and preventing you from using carry forward. (ii.co.uk)
Tapering Trap: When considering use of carry forward, you have to calculate what your total earnings were in the previous tax years you intend to use it. You also need to know what pension contributions (employer and employee) were made in these years also.
Where tapering applies, the annual allowance is reduced by £1 for every £2 of adjusted income between £260,000 and £360,000 for tax year 2023/24 onwards. For earlier tax years those amounts were between £240,000 and £312,000 (2020/21 to 2022/23).
Why Act Now?
With potential tax reforms under discussion, particularly by Rachel Reeves and the current government, the carry forward allowance could be at risk. Use carry forward while it’s still available to secure tax-efficient pension contributions. Get in touch today to maximise this valuable allowance before any legislative changes are made.
How Seymour Can Help
As you can see, getting the calculations correct and appropriate to your business size is complex, and although there are free tools out there to support individuals with this, often they do not ask all the questions needed in order to be sure the outputs are always 100% correct.
As Independent Financial Advisers with a specialism in Family Businesses and Entrepreneurs, we work with business owners and their accounts to support them with the calculations for carry forward as well as ongoing advice on their pensions and investments.
If you would like to explore this useful tool, please do arrange a call with a member of the advisory team.
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