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 (certain higher earners may be subject to a tapered annual allowance).
Most savers can now pay a substantial lump sum into their pension by making use of this generous 50% increase – and benefit from full tax relief on their contribution. Certain individuals can make an even larger contribution by ‘carrying forward’ unused annual allowances from prior tax years. This may be particularly lucrative for small business owners, who can achieve significant tax efficiencies by paying company profits into a workplace pension.
How does carry forward work?
Carry forward allows eligible pension savers to pay more than the standard annual allowance of £60,000 into their pension in a given tax year. This can be achieved by carrying forward any unused annual allowances from the three previous tax years. To be eligible for carry forward 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.
Carry forward from 2020/21 needs to be used in the 2023/24 tax year, or it will be permanently lost. Carry forward is only available if you have been a member of a registered pension scheme in a given tax year. It is not available if you have started accessing your defined contribution pension benefits.
Case study
The example table below 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 pension 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 a Lumin expert on 03300 564 446 or get in touch via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
