02 Mar 2024
Using up unused annual allowances from previous tax years can provide a healthy boost to your pension. But any remaining annual allowance from 2020/21 must be used before April 6. Martin Cotter, Managing Director of Lumin Wealth, explains more.
The standard pension allowance, the maximum amount that can be contributed into a pension and benefit from tax relief each year, increased to £60,000 in April 2023 (some higher earners may face a tapered annual allowance).
Certain individuals can make a larger contribution by ‘carrying forward’ unused annual allowances from prior tax years. This may be particularly lucrative for small business owners.
How does carry forward work?
Carry forward allows eligible pension savers to pay more than the standard annual allowance (£60,000) into their pension in a given tax year. This can be achieved by carrying forward unused annual allowances from the three previous tax years. To be eligible you must first use up your annual allowance in the current tax year, before using carry forward from prior years, starting with the earliest of the three available years.
Any carry forward from 2020/21 must be used before the 6 April, or it will be lost. Carry forward is only available if you have been a member of a registered pension scheme in a given tax year. It isn’t available if you’ve started accessing your defined contribution pension benefits.
Case study
The example table illustrates how carry forward works in practice. In this case, the taxpayer can make a large pension contribution of £75,000 by contributing a further £30,000 in the current tax year (to make full use of the £60,000 annual allowance for 2023/24), and by carrying forward unused annual allowances from previous tax years (£25,000 from 2020/21 and £20,000 from 2022/23). In this scenario the individual could achieve income tax savings of up to £35,000 on their contribution.
Benefits for business owners
Carry forward can be particularly helpful for small business owners, who can extract company profits via workplace pension contributions and boost their retirement pot, achieving substantial tax savings in the process. In contrast to personal pension contributions, tax relief-qualifying contributions via a company pension scheme are not limited to relevant UK earnings. Company pension contributions are only limited to your annual allowance, plus any available carry forward.
Do you want to know how much you could pay into your pension, and how this fits within your overall financial plan? Call 03300 564 446 to find out more, or get in touch using our contact form.
