Carry on saving with pension carry forward

Carry on saving with pension carry forward

Published: 14 Mar 2019 Updated: 13 Jun 2022

At the end of January, you may have submitted your self-assessment and settled a tax bill. But remember that any pension contributions you make between now and midnight on 5 April can be used to offset your next tax bill. You may be able to make extra pension contributions using something called pension carry forward – in this article we look at it in more detail.

What is pension carry forward?

Pension carry forward allows you to make pension contributions that are above your annual allowance, which is £40,000 for most people. It works by using any unused pension allowance from the past three tax years. This means you could potentially pay an extra £120,000 into your pension this tax year. However, your total contributions must not exceed your earnings in the tax year.

Bear in mind that you must use up your full allowance from this tax year first, then you can ‘carry forward’ starting with the earliest of the three tax years. This year, that would be the 2015/16 tax year. You need to have had a pension in place in each of the three previous tax years, but you don’t need to have made any contributions.

A reminder of the generous pension tax benefits

Pensions come with great tax benefits – which is why it makes sense to pay as much as you can into your pension. Pension contributions within your annual allowance receive up to 45% tax relief. Whatever you pay into a pension is automatically topped up by 20%. Higher and additional-rate taxpayers can then claim back another 20-25% in next year’s tax return. This means that if you are an additional-rate taxpayer, a contribution of £1,000 could cost you only £550!

A good opportunity for higher earners

Pension carry forward is useful for higher earners, particularly since the tapered allowance was introduced in April 2016. This applies when you have an income of £150,000 or more – the £40,000 annual allowance is reduced by £1 for every £2 earned above £150,000, down to a minimum of £10,000.

If you’re a higher earner, this is the last tax year that you can make the most of the £40,000 allowance that you had in the 2015/16 tax year. At the start of next tax year (6 April 2019), you’ll lose the chance forever.

“For anyone who has seen their annual allowance drop to £10,000, the opportunity to mop up a £40,000 allowance is one they should give very serious consideration to while they can.” – Andy James, Head of Retirement Planning

Find out more about pension carry forward in our guide.

Not sure how much you can afford to contribute?

Obviously, not everyone has a spare £120,000 lying around to pay into their pension. Many people are unsure how much unused allowance they have left or how much they could afford to pay in without it affecting their everyday lifestyle.

Our financial planners can answer all of your questions by calculating what your finances could look like in the future. They can help you to make the most of your pension allowances and have the retirement you want.

Book a consultation

If you want some more information on your pension allowances, book an initial consultation with a financial planner or call us on 020 7189 2400.


This article was previously published on Tilney prior to the launch of Evelyn Partners.