Maximising pension contributions with carry forward

When the annual allowance was originally introduced in 2006 pension savers could have contributions paid into their pensions of up to £215,000 without a penalty. By the 2010/11 tax year the annual allowance reached £255,000. But since that high point dramatic reductions have been made with the allowance slashed down to £40,000 before the recent increase to its current level of £60,000. Further restrictions exist with the tapered annual allowance for high earners and the Money Purchase Annual Allowance (MPAA) for those who have flexibly accessed their pension savings.

Even with these reduced allowances pension savers may, in certain circumstances, still be able to make large contributions without penalty by making use of the carry forward rules.

Providing certain conditions are met, these rules allow an individual to use unused annual allowances from the three previous tax years to increase the overall annual allowance available to them in the current tax year.

Eligibility

To make use of carry forward the individual must have fully used up their current year's annual allowance or will have by the end of the tax year. The individual must have been a 'member' of a UK registered pension scheme at some point during the year being carried forward from. A member includes an active member, a deferred member, a pension credit member or a pensioner member.

Carry forward calculations

After determining an individual's pension input amounts for a specific tax year, the first step is to compare them with the annual allowance allocated for that same year. If the total input amounts exceed the annual allowance, any unused annual allowances from previous years are allocated, starting from the earliest carry forward year. This means carry forward from three years prior to the current tax year, followed by two years prior, and finally the previous tax year can be used. For instance, if we consider the tax year 2023/24, the earliest possible carry forward year would be 2020/21. However, if the annual allowance has been exceeded in any of the three previous tax years, it is necessary to look further back to determine which year’s carry forward has been used.

Example

Vincent started paying personal pension contributions in tax year 2019/20. His pension input amounts are:

Vincent exceeded the annual allowance for 2022/23 by £10,000. His first carry forward year at this time was 2019/20, for which £20,000 was available. £10,000 from 2019/20 was used to eliminate the annual allowance excess for 2022/23, but the remaining £10,000 is lost for 2023/24 as it is more than three years ago.

Vincent’s maximum contribution without exceeding the annual allowance for 2023/24 will be £75,000, using the £60,000 standard annual allowance for 2023/24 and the £15,000 unused allowance from the 2020/21 tax year.

Carry forward and the tapered annual allowance

Where an individual with a high income is restricted by the tapered annual allowance, carry forward is still available so up to £40,000 can still potentially be carried forward from the previous three tax years. For 2023/24 the maximum taper applies to those with adjusted income in excess of £360,000 – these individuals will have a tapered annual allowance of £10,000.

Where an individual’s annual allowance has been reduced by application of the taper in previous years, only the balance of the tapered annual allowance can be carried forward to future tax years.

Example

Edison is a high earner with his total income exceeding both the 'threshold income' and the ‘adjusted income’ figures, meaning his annual allowance is tapered each year to some extent.

He started paying personal pension contributions in the 2019/20 tax year and his income rises over the years which increases the amount by which his annual allowance is tapered.

Edison can carry forward £8,000 from 2019/20 to remove the annual allowance excess in 2022/23. even though he was subject to the taper in both years.

In 2023/24 Edison has adjusted income of over £360,000 so the maximum taper applies. His allowance available will now be £10,000 and he will be able to carry forward the £14,000 unused allowance from 2020/21, allowing a maximum contribution of £24,000.

Carry forward and the Money Purchase Annual Allowance (MPAA)

Once someone has flexibly accessed their pension savings – for example by taking income under flexi-access drawdown or by receiving an Uncrystallised Funds Pension Lump Sum – they trigger the MPAA restricting their annual allowance to £10,000.

Once the MPAA is triggered, the option to use carry forward in relation to money purchase contributions made after the trigger date is lost. However, carry forward can still be used to offset or eliminate the tax charge that arises from money purchase contributions that were made in the same tax year but before the MPAA trigger date. It’s also possible to continue to use carry forward on an ongoing basis in relation to any defined benefit pension inputs.

It may be appropriate for those without any defined benefits (or no need to use carry forward in relation to defined benefits) to mop up any unused carry forward immediately before they flexibly access their benefits, as it is a case of ‘use it or lose it’.

Carry forward and tax relief

It’s important to understand that carry forward only applies to the annual allowance and not tax relief entitlement. Tax relief on member contributions is limited to 100% of a member’s relevant UK earnings in the tax year the contribution is paid, and earnings from previous years cannot be carried forward.

This means that an individual who has maximum carry forward available would only be able to make a member contribution of £180,000 (current tax year and three previous years unused allowance) if they also had the earnings in the current tax year to support it.

Example

Wendy is a deferred member of an occupational pension scheme; she has made no contributions in the past five years as she has been abroad and had no relevant UK earnings. In 2023/24 she returns to the UK and has a salary of £250,000.

As Wendy is now a UK resident with relevant UK earnings she can make contributions using carry forward, as it is not a requirement to be in the UK in the year you are carrying forward from. So, if someone has spent a period of time overseas they can carry forward any unused allowance from those years once they return to the UK providing they were a member of a registered pension scheme at some point in the relevant tax years.

Wendy is eligible to carry forward the full unused allowance from the previous three tax years so has an available annual allowance of £180,000. She can make a gross member contribution at this level (paying in £144,000 and getting £36,000 basic rate relief in the pension) as she also has the relevant UK earnings to be entitled to the tax relief.

Compare this to Tony who opted-out of his workplace pension five years ago but remained a deferred member. He has relevant UK earnings of £35,000 and has done for the last five tax years. He inherits £250,000 and wants to maximise his pension contributions.

Tony, like Wendy, is eligible to carry forward the full unused allowance from the previous three tax years so again has available annual allowance of £180,000. However the maximum member contribution Tony can make is limited to his earnings in the current tax year of £35,000. The fact he had earnings and could have made contributions in previous tax years is irrelevant. Most pension providers will only accept tax relievable contributions.

Employer contributions are paid into the pension gross and are not limited to the member’s earnings. However, any employer contribution must meet the ‘wholly and exclusively’ test – broadly meaning the employee has to add that value to the business – for the contributions to be deducted as an expense from the company’s taxable profit.

If the annual allowance is exceeded this will not impact the employer’s ability to claim the contribution as a tax-relievable business expense. Instead, if the member does not have sufficient carry forward they would be liable for an annual allowance charge personally.

There is no requirement to report the use of carry forward to HMRC, only contributions in excess of the available allowance that need to be declared on a tax return. It is recommended though that comprehensive records are kept where contributions exceed the annual allowance in any given year.

If the annual allowance is exceeded within a particular pension scheme, the scheme's administrator will provide a pension savings statement detailing the usage of the annual allowance for the current tax year as well as the three preceding tax years. This information will allow the member to verify whether they have made use of the carry forward option when filling out a self-assessment return.

However, if contributions are paid to more than one scheme in the tax year, or the individual’s allowance is tapered then it is possible to exceed the annual allowance without receiving notices.