Pensions
Catch up on missed pension payments
with carry forward
In a nutshell
01
Most people can tax efficiently put up to £60K into their pension each tax year: this contribution limit is known as their annual allowance.
02
It’s often assumed that if you don’t use all your annual allowance for a particular tax year, it’s gone for good.
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Not so. An often overlooked rule called ‘carry forward’ means you could use any unused annual allowance from the previous three tax years...
04
...to make up for previous years' missed contributions so you can maximise your pension’s potential to deliver long-term growth. Please note, you must have sufficient relevant UK earnings of over £60K per tax year to use carry forward.
Please note, the information presented in this page is for illustrative purposes only and does not constitute tax advice or recommendations.
Meet John
1
He earns a base salary of £100K and has just received a generous bonus of £80K, making his relevant UK earnings for ‘23/24 £180K.
2
John also receives rental income of £20K, however this does not count as relevant UK earnings for pension contributions.
3
A colleague mentions carry forward and explains how John could still make use of surplus pension contributions from the last three tax years.
4
After working out his budget for the year, John concludes that he has £100K spare that he would like to contribute to his pension. He’s been a member of a UK pension scheme for the last three tax years, however he has not made any pension contributions.
5
If John were to contribute the full £100K as a personal pension contribution he would attract basic rate tax relief at source, therefore £125K would be invested into his pension as the gross contribution.
6
As John’s relevant UK earnings for the tax year are £180K, he has capacity to use carry forward. John’s pension contribution is covered by the current £60K annual allowance and two previous tax years of unused allowances. This means John has been able to invest in his pension more tax efficiently and has avoided the annual allowance tax charge.
In more detail
Your pension could be your main income in later life, so it's important you contribute to this pot while you’re still earning.
One of the great things about investing via a pension is that unlike, say, an ISA, you can carry forward any unused personal annual allowance from the three previous tax years – good news for anyone who hasn’t maxed out their pension investments recently but would like to now.
You can’t get tax relief greater than your relevant UK earnings for the current tax year. So, although you may be able to claim the current annual allowance of £60k, plus three x £40K of previous tax years unused annual allowance, if you're earning £60K you’ll only get tax relief on this amount.
If you’re lucky enough to be a high earner, then there’s also the issue of pension tapering. For every £2 your adjusted income goes above £260K, your annual allowance for that year will drop by £1 - hence the name “tapering”. The drop is limited so that your minimum tapered annual allowance is £10K. The easiest way to work out your own tapered annual allowance is to follow HMRC’s guidance here.
The key thing to note is, if you want to max out your pension contribution in a particular year, check if you have any unused annual allowance from the previous three tax years. It’s also worth remembering that you must have sufficient earnings of over £60K per tax year and have been a member of the UK pension scheme for all three tax years to use carry forward. To find out what carry forward could mean for you, you can book a free call with one of our experts to discuss your options.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. If you are unsure if a pension is right for you, please seek financial advice.
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