We all know that the transitional annual allowance rules for 2015/16 are very complex, and advisers and their clients may still be getting to grips with how they are affected.
One area which has not been widely discussed is how the transitional rules interact with carry forward.
The transitional rules
For annual allowance purposes, 2015/16 was split into two: the pre-alignment tax year (6 April 2015 to 8 July 2015) and the post-alignment tax year (9 July 2015 to 5 April 2016).
The annual allowance for the pre-alignment tax year was £80,000: this prevented investors from facing unfair tax charges following the alignment of pension input periods (PIPs) to the tax year.
The annual allowance for the post-alignment tax year is £0, but investors can use their unused allowance from the pre-alignment tax year, normally capped at £40,000.
For example, an investor who contributed £65,000 in the pre-alignment tax year would have an annual allowance for the post-alignment tax year of £15,000. Someone who contributed £20,000 in the pre-alignment tax year would have an allowance in the post-alignment tax year of £40,000.
Carry forward for 2015/16
The clock is ticking, but there may still be time for investors to squeeze in a final contribution for this tax year.
Although 2015/16 was split for annual allowance purposes, it is still considered a single tax year when it comes to carry forward. Working out the total available allowance is, therefore, a two stage process.
Firstly, the investor will need to assess their allowance for the post-alignment tax year itself, which is based on their unused allowance from the pre-alignment tax year. As per the normal rules for carry forward, the current year’s allowance must be used first, so any contributions made before the end of the tax year would use up this allowance first.
Following that, investors can still carry forward any unused allowance from three whole tax years: 2012/13, 2013/14 and 2014/15. Because of the pre-alignment and post-alignment split, some thought that 2012/13 would fall out of scope when considering carry forward for the post-alignment tax year.
For example:
Kate’s pension input period has always run in line with the tax year. Her contribution history is as follows:
| Tax year | Annual allowance | Contributions | Unused allowance |
| 2012/13 | £50,000 | £35,000 | £15,000 |
| 2013/14 | £50,000 | £40,000 | £10,000 |
| 2014/15 | £40,000 | £35,000 | £5,000 |
In May 2015, she contributes £55,000, intending to use the annual allowance for 2015/16 and her unused allowance from 2012/13. In August 2015 she contributes a further £15,000 to use up the remaining carry forward.
In March 2016, Kate becomes aware of the transitional rules and consults her adviser to see how it affects her. Kate’s adviser confirms that the £55,000 contribution is tested against the £80,000 allowance for the pre-alignment tax year. Her annual allowance for the post-alignment tax year is £25,000, of which she has used £15,000 with her August contribution.
Kate therefore has £10,000 remaining allowance for the post-alignment tax year, and all of her carry forward allowance is still intact. Kate decides to contribute another £25,000: this will use up the remaining allowance for the post-alignment tax year and the unused allowance from 2012/13, which is only available to carry forward until the end of 2015/16.
Carry forward from 2015/16
Investors still need to consider the transitional rules when calculating their carry forward allowance in future tax years. Those affected by the tapered annual allowance, or are close to being affected, will have to be careful of using carry forward as it could affect their allowance – but that’s a story for another day.
Again, 2015/16 will count as a single tax year for carry forward purposes. The amount of unused allowance for 2015/16 is based on the remaining allowance at the end of the post-alignment tax year.
For example:
Daniel contributed £45,000 on 1 June 2015 and £13,000 on 1 August 2015.
His annual allowance for the post-alignment tax year is £35,000 (£80,000 – £45,000).
His unused allowance for 2015/16 for carry forward purposes is £22,000 (£35,000 – £13,000).
Eric contributed £2,000 on 1 July 2015 and £35,000 on 1 March 2016.
His annual allowance for the post-alignment tax year is £40,000 (£80,000 – £2,000, capped at £40,000).
His unused allowance for 2015/16 is £5,000 (£40,000 – £35,000).
Eric’s carry forward allowance is lower than Daniel’s, even though he contributed less during the 2015/16 tax year as a whole.
Investors who weren’t aware of the transitional rules at the time could still be affected if they wish to use carry forward in a future year. The good news is that they will most likely be pleasantly surprised.
For instance, an investor who contributed £40,000 in the pre-alignment tax year would assume they had no available carry forward for 2015/16 based on the normal rules.
However, they would actually have £40,000 of unused allowance available for a future tax year.
Jessica List is pensions analyst at Suffolk Life
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