Pension carry forward

Pension carry forward rules allow you to make contributions into a pension above the annual allowance and still receive tax relief. In this article, we look at how pension carry forward rules work and explain how you can use them to your advantage.

What is pension carry forward?

The pension annual allowance is the maximum amount that you can contribute into a pension every year and receive tax relief. For most people, this is £40,000, or 100% of their income if they earn less than £40,000.

Pension carry forward, however, enables you to contribute more than the annual allowance and still receive tax relief by carrying forward any unused annual allowances from the previous three tax years.

How does carry forward work?

To take advantage of carry forward rules, you must make the maximum allowable contribution in the current tax year (£40,000 in 2021/22). You can then carry forward any unused annual allowances from the three previous tax years.

The amount of annual allowance that you can carry forward will depend on how much of your annual allowance you used in the previous three tax years.

When assessing how much of your annual allowance you used in previous tax years, you need to include the total value of the contributions you made to your pension, any contributions made by your employer, and the tax relief you received from HMRC.

What are the carry forward requirements?

To use carry forward, there are two main requirements that you have to meet:

1. You had a UK-registered pension scheme in each tax year you wish to carry forward from. Note that you do not have to have made any contributions into this pension and the new contribution does not have to be made into the same pension.
2. You have earnings in the current tax year of at least the total amount you are looking to contribute into your pension. So, for example, if you are looking to contribute £70,000 into your pension this year using carry forward, you must have an income of at least £70,000.

When is carry forward useful?

Carry forward is particularly useful if your income fluctuates from year to year. For example, if you are self-employed and your income changes every year, carry forward rules could help you contribute more into your pension in a year in which your income is higher.

Carry forward can also be useful for high earners who are affected by the tapered annual allowance, which was introduced in April 2016. The way the tapered annual allowance works is that anyone with a ‘threshold income’ of more than £200,000 and an ‘adjusted income of more than £240,000 has their annual allowance reduced by £1 for every £2 that their adjusted income is over £240,000, up to a maximum reduction of £36,000. So, for someone earning £312,000, their annual allowance is capped at £4,000. High earners could potentially use carry forward to contribute more than their tapered annual allowance.

Here is an example of carry forward in practice.

Let’s say you earn £100,000 per year and you have made the following contributions into your pension since the 2018/2019 tax year.

In total, you have £55,000 of unused annual allowances from the previous three tax years. As a result, you can potentially contribute an additional £55,000 into your pension this year, on top of the £40,000 you have already contributed, and still receive tax relief. The total pension contribution of £95,000 is less than your income meaning you are eligible for tax relief on the full amount.

Claiming carry forward

Claiming carry forward is relatively straightforward. The first step is to check if you have any unused annual allowance from the previous three tax years that you can carry forward. The easiest way to do this is to obtain pension statements for all of the pension plans you have been registered within the current tax year and the three previous tax years. Once you have obtained these, look back to see if you have any unused annual allowance in the last three years.

Once you have determined how much you would like to carry forward, it’s simply a matter of making the extra contributions into your pension. You do not have to notify HMRC if you want to make use of any unused annual allowances from previous tax years, though it is advisable to keep a record of all your contributions.

In summary, carry forward can be an effective way to boost your pension contributions if you have unused annual allowances from the previous three tax years, but remember, any tax benefits depend on your individual circumstances and tax rules are subject to change.

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