Carry forward and annual allowance

If you want to pay large amounts into your pension then you can use your annual allowance from the three tax years before the current tax year. This is called using carry forward.

To understand how carry forward works, it’s important first to understand how  annual allowance works. 

• The annual allowance and how it works
• Tax relief and annual allowance
• How do I work out how much of the annual allowance I’ve used? 
• Carry forward and how it works
• How does the annual allowance tax charge work? 
• Taking financial advice 

The annual allowance and how it works

The annual allowance isn’t a limit on how much money can go into your pension or pensions, but it is a limit on how much money can go in without you having to pay a tax charge. 

The standard annual allowance is currently £60,000 every tax year. You could still pay more into your pension if you wanted to and could afford to, and if you have high enough earnings. But you’d have a tax charge on the amount over the annual allowance.  

The annual allowance and high earners

If you’re a very high earner, you might have a reduced annual allowance. This is called the ‘tapered annual allowance’. The rules on who is a high earner are a bit complicated. In broad terms, you may be affected by the tapered annual allowance if you have more than £200,000 in taxable income after deducting any pension contributions from you. If this applies to you, your annual allowance will be less than £60,000.  The minimum annual allowance you can have is £10,000. 

Tax relief and annual allowance

The annual allowance isn’t the maximum pension contribution you can make. However, under the rules, you can only pay in up to 100% of your earnings and still get tax relief on your pension contributions.     For example, if you’re employed and earn £40,000, the maximum you can pay into pensions and get income tax relief is £40,000. It doesn’t matter that the annual allowance is £60,000. You can find more information about tax relief on your pension contributions in A guide to how your pensions are taxed. 

This means that for employees or those who are self-employed and pay income tax, the annual allowance is typically used by high earners with defined contribution pensions and those who have long service and high salaries in the public sector and other defined benefit pensions.   

Annual allowance and business owners

If you’re a business owner, your business will often make pension contributions on your behalf as an employer pension contribution.  As corporation tax relief works differently from income tax relief, you’re not limited to earnings when it comes to how much your business can pay into your pension. This means the amount that can be paid into pensions by the business is theoretically unlimited.  

However, in the early years of a business, owners often reinvest profits into the business and only later think about saving for their future.  When they do start saving, they often want to put large amounts of money into their pensions – often at the end of the tax year. This means that annual allowance and carry forward planning are important.  

How do I work out how much of the annual allowance I’ve used?

For defined contribution pensions, the amount of annual allowance you’ve used is the total amount of money you pay in, your employer pays in and anyone else pays in on your behalf. It also includes the tax relief you’ve received on your contributions.  

For defined benefit pensions, where you have a guaranteed income at retirement, it’s more complex as there isn’t a pot of money so it’s the increase in the value of the benefits. This guide will focus on defined contribution pensions. If you are a high earner with long service and a defined benefit pension, it’s a good idea to take financial advice if you’re thinking of using carry forward. 

Carry forward and how it works

Carry forward lets you pay in more than £60,000 to your pension without facing a tax charge. It allows you to make the most of unused annual allowance from the past three years before the current tax year. So that means you may be able to pay extra into your pension over and above the £60,000 annual allowance for the current year.  

Can everyone use carry forward?

No, not everyone can use carry forward. There are three rules; 

1. You must have used your annual allowance for the current tax year first. 
2. You must have been a member of a pension scheme for the years you want to use carry forward from. It doesn’t matter if you only paid £20 to a pension 30 years ago and then never paid anything else – it just matters that you are a member of a pension scheme.  
3. You mustn't have started taking money flexibly from a pension and triggered the Money Purchase Annual Allowance (MPAA) which is explained in A guide to how your pensions are taxed.  

As you need to use your annual allowance for the current tax year before you use carry forward, if you are employed or self-employed and pay income tax and have earnings of less than £60,000 then you won’t be able to use carry forward.  

Carry forward case study

Let’s take a look at a case study to see how carry forward works in practice. Meet Murray, a company director who wants to pay £150,000 to his pension. This money is coming from the business profits as an employer pension contribution. He first paid into a pension 20 years ago when he was an employee but stopped when he started his own business 15 years ago. Because Murray was a member of a pension scheme 20 years ago, carry forward could be an option for him. He hasn’t paid any pension contributions since then.

Murray starts by looking at the current tax year first.  He uses all the £60,000 allowance. Then he looks back three years before the current year, so in this case, that’s the 2022/2023 tax year.  He didn’t use any annual allowance from that tax year so it’s available to carry forward now.  In that tax year, the annual allowance was £40,000. That means £100,000 of the £150,000 has been covered: £60,000 from the current year’s annual allowance and £40,000 from 2022/2023 tax year.  Then he moves a year forward to the 2023/2024 tax year. The annual allowance increased in April 2023 to £60,000 which is more than enough to cover the remaining £50,000 that he wants to pay in. By using carry forward, Murray can pay £150,000 into his pension in the 2025/2026 tax year without worrying about an annual allowance tax charge.  

After he had used his annual allowance and carry forward, it looks like this;