One of the major benefits of paying into a pension is tax relief, and if you have any unused annual pension allowance from previous tax years, you should be able to maximise the amount you receive by taking advantage of ‘carry forward’ rules.
Making the most of these rules could be particularly important ahead of the October Budget, as the Prime Minister Keir Starmer has made it clear that he is prepared to make some tough decisions to stabilise the public finances. Many commentators are speculating that this might involve changes to pension tax relief, which may potentially make it less rewarding for higher earners to pay into a pension.
Here we explain what you need to know to make use of pension carry forward rules so you can boost the size of your pension pot ahead of the Budget. Bear in mind, however, that using carry forward shouldn’t be entered into lightly, as you normally need to be at least 55 (57 from 2028) before you can access money in your pension, so you’ll need to be confident you can afford to tie up your money until then.
It’s also important to remember possible changes to pension tax rules are only rumours for now, and anything you decide to do must make sense for your finances.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
Contents
- How does pension carry forward work?
- How much is the pension annual allowance?
- Can you carry forward any unused pension allowances?
- Check if you have any unused annual allowance
- Carry forward example
- The tapered annual allowance and pension carry forward
- The self-employed and directors of limited companies and carry forward
- The Money Purchase Annual Allowance and carry forward
- Where to seek help
How does pension carry forward work?
Under current pension rules, you can pay a maximum of £60,000 each tax year into a pension, or 100% of your earnings, whichever is lower, and receive tax relief at your marginal rate on your contributions. This is known as your ‘annual allowance’. For every £100 you add to your pension, you only pay £80 as a basic-rate taxpayer, £60 as a higher-rate taxpayer, or 55% as an additional rate taxpayer. Read more in our guide How pension tax relief works.
However, you may be able to pay more than your annual allowance into your pension using carry forward, if you haven’t made full use of this allowance in the previous three tax years. This can be a useful way of boosting your retirement savings and benefiting from tax relief, particularly as you approach retirement. It means that in this tax year, for example, you could potentially pay up to £200,000 into your pension and benefit from tax relief.
Most of us don’t contribute a hefty £60,000 to our pension each year, or all of our earnings, giving us extra allowance to use over following years, if we wish. For example, you might have some money to spare that could be paid into your pension if, for example, you earn more one year than previously, or have received an inheritance or work bonus.
It is important to remember, however, that you cannot receive tax relief on contributions in excess of your earnings in any tax year, even using the pension carry forward rule. For example, if you earn £70,000 in a tax year, you can only contribute up to £70,000 to your pension that year, including any carried forward allowance.
If you’ve a large lump sum that exceeds your earnings, one way around this is to spread contributions into your pension over several tax years. Alternatively, you may choose to use carry forward if you make regular payments into your pension, by increasing the amount you pay into your pot on a monthly basis, as well as pay a lump sum into your pension at any time.
Bear in mind you do not need to report additional contributions under carry forward to HMRC, provided you qualify to use this rule, and haven’t exceeded your allowance. If you do contribute more than your overall allowance into your pension, you will pay a tax charge which will claw back any tax relief you received that you were not entitled to. So it’s important to ensure you’re sticking within the rules.
How much is the pension annual allowance?
The current pension annual allowance (in the 2024/25 tax year) is equivalent to 100% of your earnings or £60,000 (or potentially less if you’re a high earner, in which case see the tapered annual allowance below). This includes contributions you pay into your pension, employer contributions, and tax relief received on these. Read more in our article How do pension annual allowances work?
In the preceding 2023/24 tax year, the annual allowance also stood at £60,000 or 100% of your earnings, whichever was lower, but prior to that it was £40,000. So, if you are making use of the pension carry forward rule, these are the allowance figures to use for carry forward.
Can you carry forward any unused pension allowances?
Before using pension carry forward, check the following points to ensure you qualify to use this rule:
- You must have used all your pension annual allowance in the tax year you want to use carry forward.
- You must have contributed less than your annual allowance in at least one of the three previous tax years to qualify for pension carry forward.
- You must earn at least the amount you want to contribute in the tax year you are making the contribution for. For example, if you want to pay a total (including carry forward) of £70,000 into your pension, you must have earned at least £70,000 in that tax year.
- For the tax year from which you want to carry forward, you must have been a member of a registered pension scheme, but you do not need to have paid into it that particular year.
- If you want to carry forward any unused annual allowance, you should use the oldest unused annual allowance first to prevent it being lost in future years.
- If you are subject to the tapered annual allowance (see below) you must carefully do the sums to check how much you can carry forward. Take professional advice if you are unclear on how much you can pay into your pension. Read more in our article How to get advice on your pension.
Check if you have any unused annual allowance
You may know off the top of your head how much allowance you have used up this tax year. However, if you are unsure, you can use the government’s annual allowance calculator to check how much of your annual allowance you have. If you are not sure how much more you may be able to contribute in a particular tax year given previous allowances used, your pension provider should be able to help.
Carry forward example
Due to an inheritance, Susan may be able to pay an additional £90,000 into her pension in the 2024/25 tax year, and benefit from tax relief on this. However, to qualify for tax relief on the entire amount she can carry forward, she would need to have substantial earnings as you can only contribute up to the equivalent of 100% of your earnings in a tax year – even if you have a larger unused allowance.
Susan has paid these amounts into her pension:
2023/24 | £15,000 |
2022/23 | £20,000 |
2021/22 | £15,000 |
2020/21 | £30,000 |
How much she can carry forward:
Tax year | Annual allowance | Total contributions | Annual allowance that may be carried forward | Carry forward used | Carry forward remaining |
2023/24 | £60,000 | £15,000 | £45,000 | None | £45,000 |
2022/23 | £40,000 | £20,000 | £20,000 | None | £20,000 |
2021/22 | £40,000 | £15,000 | £25,000 | None | £25,000 |
Total: | £90,000 |
As the table shows, Susan can pay in up to £90,000 this tax year without an annual allowance tax charge applying, as she can carry forward her unused annual allowance from the three previous tax years. This is on top of the £60,000 she can pay into her pension in the current 2024/25 tax year.
The tapered annual allowance and pension carry forward
Calculations for how much you can carry forward get more complicated if you are subject to the tapered annual allowance, introduced In April 2016. This affects how much tax relief high earners can claim on their pension contributions.
The tapered annual allowance essentially means that in the 2024/25 tax year for every £2 you earn over £260,000 (which is the adjusted income threshold), your annual allowance will reduce by £1. The lowest your annual allowance will reduce to is £10,000, which is known as the minimum tapered annual allowance.
Under these rules, the most that can be deducted from your annual allowance is £50,000.
Anyone earning more than £312,000 will, for example, have a maximum annual allowance of £10,000. So if you made no contributions to your pension that tax year, you would have £10,000 to pay into your pension another year using carry forward.
When looking at carrying forward tapered allowances, it’s important to know the different minimum tapered annual allowances and the relevant adjusted income thresholds for previous years. You can find these here:
Minimum annual allowance
Tax year | Minimum tapered annual allowance |
2024/25 | £10,000 |
2023/24 | £10,000 |
2022/23 | £4,000 |
2021/22 | £4,000 |
The self-employed and directors of limited companies and carry forward
Carry forward can be particularly useful if you are self-employed and the amount you earn changes each year. In this scenario, with a fluctuating income, you may want to keep hold of your earnings to meet day-to-day costs and pay your tax bill, and only decide how much you want to pay into your pension when you know what’s affordable that year. You may then decide to pay a lump sum into your pension, and make use of the carry forward rule if it’s been a bumper year. However, remember that to receive tax relief your earnings need to be the same or more than your total pension contributions in the tax year you make them.
Alternatively, if you run your own limited company you can choose whether any pension contributions come from the company, or if they are made as a personal contribution. However you need enough income (salary payments) to meet the contribution for tax relief to apply. For example, if you want to contribute £10,000 in a tax year as a personal pension contribution, your earnings on which you pay tax (your salary, not including your dividends) must amount to at least the same amount.
If you are a business owner and paying into your pension directly from the company, then you can generally pay any amount in, without needing to worry about the sum not exceeding earnings. In this case, your contributions can be considered a business expense for tax purposes (reducing liability to corporation tax). Company contributions still count towards your annual allowance, and you can make use of the carry forward rule. Beware, though, that if you pay a large sum into your pension via your company, this will reduce your profits and dividend payments.
The Money Purchase Annual Allowance and carry forward
If you start drawing money from your pension from the age of 55, you may trigger the Money Purchase Annual Allowance (MPAA) which reduces the amount you can pay into your pension to £10,000. Under the MPAA, you receive tax relief on pension contributions up to 100% of your earnings, or £10,000, whichever is lower.
You can’t use carry forward to pay contributions to a defined contribution scheme above the MPAA, so once the allowance is triggered, tax relievable contributions are limited to £10,000. Contributions above that amount attract an annual allowance charge. Carry forward is however still available if you belong to a defined benefit or final salary pension scheme.
You may be subject to the MPAA if, for example, you take all or part of your pension as a lump sum, or you move your pension into a drawdown plan and start receiving an income. Buying an annuity does not typically trigger the MPAA, but there are some types of flexible annuities that may trigger, to be sure you know where you stand.
However, the MPAA doesn’t apply if you withdraw, in full, one or more pensions using the ‘small pots’ rules that apply to pensions valued at less than £10,000. The MPAA also doesn’t apply in the case of defined benefit, or final salary pension schemes. It only applies to the more commonplace defined contribution, or money purchase pensions. You can find out more about how the Money Purchase Annual Allowance works in our guide What is the Money Purchase Annual Allowance?
Where to seek help
Depending on your personal situation and employment status, using the carry forward rule can be complicated and you may need the help of a tax and/or a professional financial advisor. If you want help from an accountant, you can find a qualified chartered accountant in your local area using the Institute of Chartered Accountants in England and Wales’ (ICAEW) directory of chartered accountants.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
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