Using your Pension carry forward allowance
What is carry forward?
Pension carry forward rules enable you to use unused allowances from the previous three tax-years, when this year’s allowance has already been used.
Each tax year, you have what is called an ‘annual allowance’. The annual allowance limits the amount you can contribute to your pension, without suffering a tax charge. For the current tax year (2024/25) the annual allowance is £60,000.
For high earners
- your annual allowance may be tapered down
- However, everyone will retain an annual allowance of at least £10,000.
You may be able to contribute more than your annual allowance, if you have unused allowances from the previous three tax years3. You must utilise your annual allowance for the current tax year first.
In the current tax year, you could carry forward up to £140,000 from the previous three tax years (2021/22, 2022/23, 2023/24) on top of this tax year’s allowance of £60,000, resulting in a total gross contribution of £200,0004 in 2024/25.
A £160,000 net contribution could result in an immediate uplift of £40,000 through basic rate tax relief at source. Further higher and additional rate tax relief can be obtained via your self-assessment tax return5.
How can carry forward benefit you?
The following case studies illustrate how carry forward can be applied to real-life scenarios.
Case study 1: Employed client
Sarah has earnings of £130,000 in 2024/25. Sarah has received employer contributions of 5% (£6,500 gross) into her pension, in addition to making employee pension contributions of 5% (£6,500 gross) per annum. These contributions have remained level throughout the current and previous three tax years.
Sarah’s carry forward allowance has been calculated as follows.
| Tax year |
Employer Pension Contributions |
Personal Pension contributions |
Annual Allowance |
Unused Allowance |
| 2021/22 |
£6,500 | £6,500 |
£40,000 |
£27,000 |
| 2022/23 |
£6,500 |
£6,500 |
£40,000 |
£27,000 |
| 2023/24 |
£6,500 |
£6,500 |
£60,000 |
£47,000 |
| 2024/25 |
£6,500 |
£6,500 |
£60,000 |
£47,000 |
| Total unused allowance |
£148,000 |
|||
When making personal pension contributions, you must have earnings of at least the amount you wish to contribute, including the carry forward funds. As such, although Sarah has a total unused allowance of £148,000, the total amount she can contribute to pensions in 2024/25 is £130,000 gross.
As Sarah has already made personal pension contributions of £6,500 gross, if she wishes to maximise her pension fund using carry forward for this tax year, she can contribute a further £123,500 gross.
Sarah would pay in the net amount of £98,800, and the pension scheme would apply for basic rate tax relief on the contribution, grossing it up to £123,500. Combined with the £6,500 contributions already accounted for, Sarah would have maximised her pension contribution for 2024/25.
| Regaining the personal allowance When adjusted net income exceeds £100,000 the personal allowance (£12,570) is reduced by £1 for every £2 above £100,000. This is sometimes known as the 60% tax trap, as earnings between £100,000 - £125,140 are effectively taxed at 60%. Sarah’s adjusted net income is £123,500 (earnings less personal pension contributions) and as such, her personal allowance is reduced to £820. Sarah can make pension contributions to effectively reduce her adjusted net income to below £100,000 and regain her full annual allowance, escaping the 60% tax trap. To illustrate the impact of this, if Sarah was to make total pension contributions of £30,000 in 2024/25, the effective rate of tax relief on the contribution would be 58%. |
Case study 2: Business owner client
John owns a limited company and pays himself a small salary of £12,570 and takes dividends of £80,000. The business has been performing well and there have been large profits in recent years.
One of the advantages of being a business owner is that you can make employer contributions to your pension6. Employer contributions are not restricted by earned income (excluding dividends), although they are still subject to the annual allowance.
John has made employer pension contributions of £500 per month in the current and previous three tax years.
John’s carry forward allowance has been calculated as follows.
| Tax year |
Employer Pension Contributions |
Personal Pension contributions |
Annual Allowance |
Unused Allowance |
| 2021/22 |
£6,000 | Nil | £40,000 |
£34,000 |
| 2022/23 |
£6,000 | Nil | £40,000 |
£34,000 |
| 2023/24 |
£6,000 | Nil | £60,000 |
£54,000 |
| 2024/25 |
£6,000 | Nil | £60,000 |
£54,000 |
| Total unused allowance |
£176,000 |
|||
John’s personal pension contributions are limited to his earnings of £12,570.
However, the company can contribute up to £176,000 gross in 2024/25. These contributions will also be an allowable business expense for the company, if they meet the ‘wholly and exclusively’ rules, reducing the company corporation tax liability.
What you can contribute to your pension will vary depending on your individual circumstances. If you wish to utilise your carry forward allowance, please speak to your financial advisor.
- ‘Threshold Income’ above £200,000 and ‘Adjusted Income’ above £260,000.
- By £1 for every £2 above £260,000.
- You must have been a member of a pension scheme during these years.
- Assuming no contributions have been made in the current or previous three tax years.
- To claim the full amount of tax relief you must have a sufficient tax liability.
- As long as the contributions meet the ‘wholly and exclusively’ test.
Please note:
This article has been written based on current legislation. Tax rules are subject to change and tax benefits available to you will depend on your personal circumstances.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
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