What are the pension allowance carry forward rules and how do they work?

Each tax year, you can make payments to your pension. You will receive tax relief on those payments, and the pension allowance carry forward rules may allow you to contribute even more if you have unused allowance from previous years.

There are limits to how much you can contribute. In fact, this is known as your annual allowance. However, carry forward allows you to use any unused allowance from the three previous tax years. You then carry the unused allowance forward to this tax year. As a result, you can save more towards your retirement. 

This is subject to your income being higher than or equal to the amount you want to put into your pension. For example, if you wish to contribute £70,000 to your pension, you must earn at least £70,000 this tax year.

Can I use carry forward?

To use carry forward, the pension allowance carry forward rules set out four main criteria you must meet.

You must have been a member of a registered UK pension scheme during the applicable time. This applies even if you were not contributing to the scheme. The state pension is not taken into account.

In the tax year that you wish to carry forward, you must have used your full annual allowance.

The unused allowance from the earliest of the three years in question must be used first. After that, it can only be used once.

You have not triggered the money purchase annual allowance (MPAA). This can be triggered by taking taxable money on a flexible basis from a defined-contribution pension.

What is the annual allowance?

Each tax year, you can make contributions to your pension. Tax relief is applied to these payments. The annual allowance is the maximum amount you can contribute and receive tax relief. Otherwise, you will be subject to an annual allowance tax charge if you exceed your allowance. As such, you will pay tax on any payments above the allowance.

The standard allowance for the 2025/26 tax year is £60,000. However, for earnings above £200,000, the tapered annual allowance applies. In that case, this might be between £10,000 and £59,999.

Withdrawing money from a money purchase pension scheme, may trigger the money purchase annual allowance (MPAA). However, this does not include the tax-free lump sum. If so, your contributions may be limited to £10,000.

Do I qualify for tax relief on my pension contributions?

To qualify for tax relief on defined-contribution pensions:

Your contributions must be equal to or less than what you earn.

The total of all contributions must not be higher than your annual allowance. This includes any contributions from your employer.

The same rules apply to a defined benefits pension. However, your annual allowance is calculated differently. Specifically, how much your pension has increased in value is used rather than how much you have paid in.

How does carry forward work?

If your pension contributions for the current tax year exceed your annual allowance, you usually have to pay a tax charge. However, if you can carry forward any unused allowance from the previous three tax years under the pension allowance carry forward rules, you may be able to reduce or remove any tax.

The standard annual allowance is £60,000. The table below shows how carry forward can reduce the annual allowance tax charge on an overpayment of £35,000.

Before carry forward

Tax year	Your annual allowance	Payments into your pension	Unused allowance
Current	£60,000	£95,000	-£35,000
2024/25	£60,000	£14,000	£46,000
2023/24	£60,000	£12,000	£48,000
2022/23	£40,000	£10,000	£30,000

 

After carry forward

Tax year	Your annual allowance	Payments into your pension	Unused allowance
Current	£60,000	£95,000	£0
2024/25	£60,000	£14,000	£46,000
2023/24	£60,000	£12,000	£43,000
2022/23	£40,000	£10,000	£0

 

With a defined-contribution pension, you are still unable to obtain tax relief on any contributions above your income level.

The example assumes you have had the standard annual allowance of £60,000 for all the tax years. If you earn above £200,000, the tapered annual allowance may be applicable.

If you can use carry forward to cover all of any tax charge, you do not need to do anything else. However, you will still have to pay the remainder if it only reduces the tax charge.

How to pay any remaining tax charge.

Once you have calculated any charges that are due, you can pay in two ways.

You can ask your pension provider to pay, which will reduce your pension. However, your provider may not offer this service, particularly if the charge is less than £2,000.

Alternatively, you can pay the charge yourself.

Using carry forward to make significant or irregular pension contributions.

The pension allowance carry forward rules can be helpful if you wish to make significant pension contributions or if your earnings vary yearly. If you earn less in one year than you want to pay in, you can spread the payments over a number of tax years.

Can I use carry forward if I run a small business?

If you run your own limited company, you normally decide how contributions to your pension are paid. These can be employee contributions from your salary or employer contributions from the company.

For employee contributions to qualify for tax relief, they cannot be higher than your earnings for that tax year. Also, payments from dividends do not count as earnings.

Total contributions from employees and employers must be within your annual allowance, including any allowance carried forward under the pension allowance carry forward rules.

Although employers' contributions do not qualify for tax relief, they can be deducted as a business expense. Consequently, this will reduce the amount of corporation tax the company is liable for.

This is allowed if the employer pension contributions are 'wholly and exclusively' for business purposes. This means they are a reasonable amount for the work being done.

Get expert advice

The pension allowance carry forward rules allow people to make additional contributions to their retirement planning in a tax-efficient manner. They can also help reduce or eliminate any annual allowance tax charges. However, it is always recommended to speak to a qualified advisor to ensure you maximize the use of the rules.

Let Regulated Advice match you with a financial advisor for expert advice.