When the annual allowance for pension contributions was originally introduced in 2006, pension savers could have contributions paid in of up to £215,000 without a penalty. However, by the 2010-11 tax year the annual allowance had 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 in chancellor Jeremy Hunt’s Spring Budget.
Further restrictions still exist with the tapered annual allowance for high earners and the money purchase annual allowance 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 overall their 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 done so by the end of the tax year.
The individual must also 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 then 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 to the current tax year, and then 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 listed in the below table.
Tax year | Pension input | Annual allowance | Unused allowance |
2019-20 | £20,000 | £40,000 | £20,000 |
2020-21 | £25,000 | £40,000 | £15,000 |
2021-22 | £40,000 | £40,000 | £0 |
2022-23 | £50,000 | £40,000 | (£10,000) |
Vincent exceeded the annual allowance for 2022-23 by £10,000 and 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.
