Pension Carry Forward: don’t let your allowance go to waste

If you’re looking to boost your retirement savings and cut your tax bill, the Pension Carry Forward Allowance is a powerful tool. It allows you to make the most of any unused pension allowance from the past three tax years, helping you maximise contributions while benefiting from generous tax relief.

But how does it work, and how can you take advantage of it before the end of the tax year? Let’s break it down.

Understanding the annual allowance

Every tax year, there’s a cap on how much you can contribute to your pension while still receiving tax relief. This is called the annual allowance. For 2024/25, the standard annual allowance is £60,000 or your total earnings for the tax year, whichever is lower.

For example:

• If you earn £30,000 a year, the most you can contribute and still receive tax relief is £30,000.
• If you earn £90,000, your maximum contribution is £60,000.

If you’re a high earner, you may be subject to a tapered annual allowance, which gradually reduces your pension annual allowance if your income is high enough. Let’s explore this in more detail and whether this would apply to you.

Does the tapered annual allowance apply to you?

If your income exceeds certain thresholds, your annual allowance is reduced, limiting how much you can contribute to your pension tax-efficiently. There are two key terms to consider.

One is the threshold income, your total taxable income before any pension contributions. If your threshold income is below £200,000, no tapering will apply, and you can keep the full £60,000 Annual Allowance.

Example

• Salary: £180,000
• Bonus: £10,000
• Personal pension contribution: £10,000
• Threshold income = £180,000 + £10,000 – £10,000 = £180,000

Since the threshold income is below £200,000, no taper applies, and the full £60,000 allowance remains.

Another key factor is adjusted income: this includes all taxable income plus employer pension contributions. If your adjusted income exceeds £260,000, your Annual Allowance is reduced by £1 for every £2 over this threshold.

Here’s an example.

• Salary: £250,000
• Bonus: £20,000
• Employer pension contribution: £30,000
• Adjusted Income = £250,000 + £20,000 + £30,000 = £300,000

And then, the allowance reduction would be:

• £300,000 – £260,000 = £40,000 over the limit
• £40,000 ÷ 2 = £20,000 reduction
• New Annual Allowance = £60,000 – £20,000 = £40,000

This tapering is stopped when the tapered Annual Allowance reaches £10,000, so for those earning over £360,000, the tapered allowance is capped at £10,000.

How Pension Carry Forward works

Now that we’ve covered how to calculate your annual allowance, let’s take a deeper look at how the Pension Carry Forward works. This strategy allows you to contribute more to your pension by carrying forward unused allowances from the previous three tax years. Essentially, if you haven’t used up the full allowance in past years, you can “carry forward” that unused allowance to the current tax year, enabling you to contribute more than the standard limit while still benefiting from tax relief.

Previous annual allowance limits

Here are the annual allowance limits for the current and past three tax years:

• 2024/25: £60,000
• 2023/24: £60,000
• 2022/23: £60,000
• 2021/22: £40,000

Key rules to keep in mind when using Carry Forward

1. Eligible pension scheme: You must have had a UK-registered pension open during the tax years you are carrying forward from. If you didn’t have a pension in those years, you won’t be able to use that year’s unused allowance.
2. Current year first: Before dipping into any unused allowances from previous years, you must first use up your current tax year’s annual allowance. This ensures that you’re maximising your contributions in the present year before tapping into prior years’ unused allowance.
3. Contribution limit: You can only contribute up to your total earnings for the tax year. This means that if your earnings are £90,000, even if you have £120,000 in unused allowance, the most you can contribute is £90,000 for that year. So, while Carry Forward lets you contribute more, your contributions are still capped by what you earn.
4. Using the oldest allowance first: Unused allowances from the oldest year are used first. This means that if you have unused allowance from 2021/22, it will be used up before any allowance from 2022/23 or 2023/24.
5. Expiry of unused allowance: Once a tax year is more than three years old, any unused allowance from that year expires and can no longer be carried forward. This is why it’s crucial to act quickly if you want to take full advantage of your Carry Forward allowance, especially for unused amounts from 2021/22, which must be used before 05th April 2025.

Example: making the most of Carry Forward

Let’s take a look at how this works in practice. Here’s an example.

• 2021/22: £30,000 unused
• 2022/23: £5,000 unused
• 2023/24: £20,000 unused

In the 2024/25 tax year, your earnings amount to £150,000, and you have already contributed £40,000 to your pension.

Since £20,000 of your current annual allowance is still available, and you have £55,000 in unused allowances from the previous three tax years (2021/22, 2022/23, and 2023/24), you can contribute up to £75,000 to your pension in 2024/25.

This allows you to maximise your tax relief while significantly boosting your retirement savings.

By making the most of the Carry Forward option, you can take full advantage of unused allowances from past years, which can significantly enhance your pension pot without incurring additional tax. It’s a strategic way to top up your retirement savings and reduce your tax burden.

The tax relief benefits of Carry Forward

One of the greatest advantages of Carry Forward is the potential for significant tax relief, making it a powerful strategy for individuals and business owners alike.

For higher-rate and additional-rate taxpayers, the savings can be substantial. Since pension contributions receive tax relief at your highest rate of income tax, the true cost of investing in your pension is lower than it first appears.

• If you’re a higher-rate taxpayer (40%), a £10,000 pension contribution effectively costs you only £6,000 after tax relief.
• If you’re an additional-rate taxpayer (45%), the same £10,000 contribution effectively costs just £5,500.

For business owners, employer pension contributions offer another advantage, they count as a business expense, reducing your corporation tax liability. This is particularly useful if your company has excess profits, as pension contributions help offset taxable income while securing funds for retirement.

Another key tax benefit relates to the personal allowance threshold. If your adjusted income exceeds £100,000, your tax-free personal allowance begins to taper. Making pension contributions can reduce your adjusted income, helping you reclaim your full £12,570 personal allowance and lowering your overall tax bill.

With these tax-saving opportunities in mind, Carry Forward allows you to enhance your pension pot while maximising tax relief, a win-win scenario.

Why use Carry Forward?

The Carry Forward allowance is particularly useful if:

• You receive a large bonus or a one-off payment and wish to invest a larger amount into your pension.
• Your business can make a large pension contribution, reducing corporation tax.
• You had lower earnings in previous years, leaving unused allowances.
• You want to take advantage of tax relief at a higher rate before it’s lost.

By making full use of this strategy, you can significantly increase your pension savings while optimising your tax position.

Final thoughts

Pension Carry Forward is a powerful strategy that allows you to make up for any missed pension contributions in previous years while maximising the tax relief available to you. By utilising this opportunity before your allowances expire, you can significantly boost your retirement savings and reduce your overall tax bill.

To make the most of the Carry Forward option, it’s essential to first review your pension contributions from the last three years. Remember, acting before the tax year ends is crucial to prevent any unused allowances from being lost.

With careful planning and the right approach, Pension Carry Forward offers a valuable way to strengthen your financial future and secure a more comfortable retirement.

Please book an appointment so that we can help you make the most of your pension allowance and explore your investment options.

*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.