How ‘carry forward’ can increase your pension allowance

Pension carry forward is an allowance enabling you to utilise unused pension allowances from previous tax years. It can be useful if you’ve used up all of your annual pensions allowance for the current tax year. This is because it can enable you make tax-efficient pension contributions that exceed the current tax year’s pensions allowance.

Let’s suppose you’ve made a maximum allowable pension contribution from your earnings (including any employer contributions) of £60,000 in the current tax year. Then any earnings in excess of your pension contributions could potentially be subject to income tax. But unused pensions allowances from the previous three years aren’t necessarily lost, as you can bring these forward into the current tax year.

So, if you had a total of £40,000 of unused pensions allowances from the previous three years, then you could add this figure to the £60,000 pensions allowance from the current tax year. You would then have a pensions allowance in the current tax year of £100,000. But you would need to be earning at least £100,000 in the current tax year to use all these allowances. That’s because your current year’s salary sets the limit for how much can be used from all four years.

Use allowances in chronological order

According to tax rules you must use the current year’s pensions allowance first, before you can use allowances from previous years. If you have unused annual allowances from more than one year, you need to use them in order of earliest to most recent. So, if you used up your pensions allowances from the current tax year and from three years ago, you could potentially have two years’ allowances available for the next tax year. But unused pensions allowances from more than three years ago are lost forever.

Please note that the annual maximum allowable pension contribution was £40,000 in each of the three tax years leading up to the 2023/24 tax year. So this is the maximum limit for pension contributions in each of those tax years.

To be eligible for carry forward, you need to have been a member of a pension scheme at some point during the tax years you want to include. The scheme must fall into one of the two following categories to be eligible:

• UK registered pension

• Overseas pension in which you or your employer qualify for UK tax relief.

If you only became a member of an appropriate pension scheme two years ago, then you can only carry forward those two years. But you might perhaps have an old eligible pension scheme with a bit of money in it that covers all three years. In this case you would be able to use carry forward for all three years.

One thing to note: if you’ve started to make withdrawals from your pension or you buy an annuity with your pension pot, then you may be unable to carry forward previous years’ allowances. The rules here are complex and you may benefit from talking to a financial adviser.

It can also be challenging to work out the unused allowances when you earn more than £200,000, as you could then face tapering of your pensions allowance. Once again, you may benefit from taking financial advice. At Schroders Personal Wealth, one of our principles is to have regular reviews with an adviser. Advisers monitor financial regulations and can help ensure you get the best from them.