Kyle Chubb | Thursday 20th January, 2022
But there is a way you can legally triple or more your yearly pension allowance.
In this article, we’ll explain how you can maximise tax relief on pension contributions by carrying forward your pension allowance from previous years.
Most people in the UK can claim tax relief on up to £40,000 (or 100% of their earnings, which is lower) each year. Any contributions you make above this cap will be taxed at your marginal rate.
However, if you didn’t use your full allowance over the previous three tax years, you can combine this unclaimed tax relief to make a one-off, large pension contribution.
You ‘carry forward’ your unused pension allowance and use it all at once for this tax year - letting you enjoy extra tax relief on pension contributions above £40,000.
Here’s how it works.
If you’d like to contribute more than £40,000 this year (and still enjoy tax relief) you can - you just need to use your previous years’ pension allowance.
There is one caveat. You need to have been a member of a pension scheme for every year you want to claim. You ‘earn’ for your extra allowance by having a pension and not paying in.
You can’t, for example, carry forward your allowance from 2019/20 if you didn’t have any pension that year.
Here’s what you need to know: if you’ve had a pension for the last few years and HAVEN’T paid in £40,000 each year, you will have unused pension allowance which you can carry forward to this year.
Making pension contributions for the previous tax years is fairly straightforward - as long as you meet the criteria.
As long as you contributed LESS than £40,000 to your pension less year (including tax relief), you can use your unused allowance to make a larger contribution this year.
While you can carry forward allowances from previous years, you won't be able to attribute contributions this year to previous tax years. You can carry forward, you can't 'carry back'.
If you want to make a sizeable contribution, it might make sense to break it down into two separate tax years, letting you enjoy the maximum tax relief available.
The amount you can carry forward depends on how much you’ve paid in and how much you earn.
You only accrue an allowance by holding a pension. You can’t open a pension today and claim tax relief for the last three years.
Additionally, you can only contribute up to the equivalent of 100% of your earnings in a tax year - even if you have a larger unused allowance.
For example, if you earn £50,000 a year, the maximum you can only contribute into your pension for the tax year is £50,000. You’ve carried forward £10,000 of your allowance.
It all means the absolute maximum you can carry forward is £120,000. This is on top of your allowance for this year, making for a total 4 years allowance.
Adding that to the current year’s allowance, the maximum you can contribute in one tax year with full tax relief is £160,000
This is for someone that has held a pension for four years but hasn’t made a single contribution in that time. Essentially, you’ve banked four years allowances of £40,000 for use at one time.
If you’re a very high earner (over £240,000 a year) you’ll also be limited by the tapered pension allowance. More on that later.
You can claim any unused pension allowance for the previous three tax years.
Today, that means you can use any allowances from as far back as 2018/19 tax year.
There is one more restriction you should know about. When carrying forward unused allowance, you need to use the earliest available allowance first.
Let’s say you haven't paid into a pension for three years and want to make a big contribution this year. You’ll need to use unused allowance from 2018/19 first.
A pension contribution of £60,000 would comprise of:
This means that next year, you’ll lose the remainder of your unused allowance from 2018/19 - that’s because you can only carry forward from the last three years, even if you didn’t fully use your allowance.
Once you’ve worked out how much you can contribute, how do you actually get to enjoy your added tax relief?
If you’re a basic rate taxpayer, you’ll get your pension contributions back automatically through your pension provider. You'll be able to see the added tax relief in your pension within a few weeks.
If you’re a higher earner, you’ll get basic rate tax relief applied automatically - but will need to complete a self-assessment tax return to apply for extra tax relief back from HMRC.
Don't worry, our guide on adding pension contributions to your tax return walks you through exactly how to do it.
One more thing to keep in mind. Very high earners will be affected by the tapered pension allowance.
For every £2 you earn above £240,000, your annual pension allowance is reduced by £1, up to a maximum reduction of £36,000.
If you earn £312,000 a year or above, your pension allowance will be capped at the lowest tapered allowance of £4,000 a year - even if you carry forward from previous years.