Introduction to Carry Forward of Unused Pension Tax Relief
Published / Last Updated on 03/11/2023
Pension Annual Allowance
The maximum amount you and your employer can pay into all your combined pension schemes each year is call the Annual Allowance. This is the maximum value (or equivalent value) that you and your employer can pay in (or be deemed have paid into) you pension funds each year.
This is usually the lower of your salary of the annual allowance. For example, in tax year 2023/24 the annual allowance is £60,000.
- If you earn £30,000 pa, the maximum you and your employer can pay into pensions is £30,000 for that year.
- If you earn £80,000 pa, the maximum you and your employer can pay into pensions is £60,000 for that year.
The annual allowance for 2023/24 is £60,000 having increased from £40,000 in 2022/23. See Annual Allowance
What if you do not pay in the maximum pension annual contribution in a tax year? Carry Forward:
You are allowed to carry forward unused tax relievable pension contributions for up to 3 years. This means unused pension allowances from previous years are not lost but they are lost if the shortfall was four years ago.
Example of Carry Forward:
|
Tax Year |
Gross Earnings |
Annual Allowance |
Combined EE/ER contributions in Tax Year |
Unused Allowance in Tax Year |
|
2023/24 (current tax year) |
£150,000 |
£60,000 |
£0 |
£60,000 current tax year |
|
2022/23 |
£100,000 |
£40,000 |
£10,000 |
£30,000 carried forward |
|
2021/22 |
£90,000 |
£40,000 |
£10,000 |
£30,000 carried forward |
|
2020/21 |
£80,000 |
£40,000 |
£10,000 |
£30,000 carried forward |
|
2019/20 |
£80,000 |
£40,000 |
£10,000 |
£30,000 not allowed carry forward as 4 years before |
|
Total allowance available in Tax Year 2023/24 |
|
|
|
£150,000 |
- You must use up the whole of your pension allowance in the current tax year before you can top up any unused allowance for the previous three tax years.
- After contributing the maximum for the current tax year, you then fill up the previous three years of carry forward with the oldest qualifying year first.
Remember the maximum you can pay into a pension is your earnings for the current tax year i.e., you cannot pay in what you have not earned in the tax year.
Example 1: James earned £100,000 this year 2023/24. James and his employer combined can pay in:
- £60,000 for tax year 2023/24, using up the full annual allowance for this tax year.
- £30,000 for tax year 2020/21 using up the whole of the allowance carried forward for that tax year.
- £10,000 for tax year 2021/22 using up the £10,000 of the allowance carried forward for that tax year but leaving £20,000 still unused.
- Unused tax relief in 2021/22 is now £20,000 and £30,000 for 2022/23 that can be mopped up next year if possible.
Example 2: Janine earned £150,000 this year 2023/24. Janine and her employer combined can pay in:
- £60,000 for tax year 2023/24, using up the full annual allowance for this tax year.
- £30,000 for tax year 2020/21 using up the whole of the allowance carried forward for that tax year.
- £30,000 for tax year 2021/22 using up the whole of the allowance carried forward for that tax year.
- £30,000 for tax year 2022/23 using up the whole of the allowance carried forward for that tax year.
- Janine has used up the whole of the carry forward of unused tax relieved pension contributions.
Employers may be able to pay in more if you cannot afford to make up unused contributions or if you do not earn enough in the current tax year (e.g. James above). This is provided any additional contributions are provided “wholly in connection with trade” i.e., the overall remuneration package (pay and pension contributions) are commensurate with the ‘going rate’ average remuneration for an individual performing that role.
