It\u2019s often assumed that if you don\u2019t use all of your annual pension allowance it\u2019s gone for good. Not so, thanks to carry forward.

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What is carry forward?

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You probably already know that a pension is a \u2018tax efficient\u2019 way to invest your money for the future because you can get tax relief on payments to your pot.\u00A0Thanks to tax relief, a contribution of \u00A3100 effectively turns into \u00A3125 \u2013 or even more if you are a higher rate taxpayer.

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Read more: Tax relief on personal contributions

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However, there is a point at which the benefits you\u2019re allowed to receive are capped. The annual allowance is a cap on the amount you can contribute to your pension each tax year while still receiving tax relief. It's based on your earnings for the year and is capped at \u00A360,000.

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Read more: How much can I pay into a pension

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If you don\u2019t use your full pension allowance in time for tax year end, don\u2019t worry. Pension rules are quite different to ISAs in the sense that you\u2019re allowed to carry forward any surplus allowance from the previous three tax years. Music to the ears of anyone who hasn\u2019t maxed out their pension contributions recently but would like to.\u00A0

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To use carry forward, you must make the maximum allowable contribution in the current tax year and use any unused annual allowances from the three previous tax years, starting with the tax year three years ago.

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Read more: Carrying forward your pension allowance

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How much am I allowed to carry forward?

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You can\u2019t get tax relief greater than your income for the current year. \u00A0

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It may be that you\u2019ve contributed zero for the last three tax years, but if you're earning \u00A380,000 you\u2019ll only get tax relief on this amount. Disappointing perhaps, but still significantly more than the standard \u00A360,000.

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For higher earners, there\u2019s the issue of pension tapering to consider. For every \u00A32 your adjusted income goes above \u00A3260,000, your annual allowance for that tax year will drop by \u00A31. However, if your \u2018threshold\u2019 income for the tax year is \u00A3200,000 or less, your annual allowance won\u2019t be reduced. The minimum annual allowance is \u00A310,000.

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The table below shows how your annual allowance currently reduces as your income increases above \u00A3260,000.

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\n\t\t\t Total adjustable income \n\t\t\t	\n\t\t\t Annual allowance \n\t\t\t
\u00A3260,000	\u00A360,000
\u00A3270,000	\u00A355,000
\u00A3280,000	\u00A350,000
\u00A3290,000	\u00A345,000
\u00A3300,000	\u00A340,000
\u00A3310,000	\u00A335,000
\u00A3320,000	\u00A330,000
\u00A3330,000	\u00A325,000
\u00A3340,000	\u00A320,000
\u00A3350,000	\u00A315,000
\u00A3360,000	\u00A310,000

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If your total income exceeds \u00A3360,000, the annual allowance is capped at \u00A310,000.

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Find out how to\u00A0calculate your tapered allowance.\u00A0

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The rules around tapering have changed for this tax year and remain quite complicated. The easiest way to work out your own tapered annual allowance is to follow\u202FHMRC\u2019s guidance.\u00A0\u00A0

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What does this mean in practice?

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For an example of what this looks like, and a little more explanation on how to catch up on missed pension payments, take a look at our Nutmeg Nugget. \u00A0

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The key thing to remember 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 years. To find out what carry forward could mean for you just\u00A0get in touch. That's what we're here for.\u00A0

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Risk warning

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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.