Pension carry forward
Post Author:
Angie Harvey
Date Posted:
November 8, 2018
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This is the second blog in our pension series, where we discuss pension carry forward.
Normally, the maximum amount that you can pay into your pension each tax year is £40,000. However, as explained in our blog Pension complication!, your annual allowance can sometimes be restricted due to the level of your income.
The good news is that HMRC allow you to carry forward unused pension allowances from the three immediately preceding tax years if you were a member of a registered pension scheme during these years.
Carry forward allowances can be a useful tax planning tool. Let’s take the example of someone with taxable income in 2018/19 of £230,000. This would normally mean that their pension allowance in 2018/19 is restricted to £10,000.
However, what if their income in the previous three tax years was £100,000, they were a member of a registered pension scheme, but they paid no pension contributions in that time?
The full unused pension allowance of £40,000 can be carried forward from 2015/16, 2016/17 and 2017/18 i.e. a total of £120,000. If we add in the annual allowance for 2018/19 of £10,000 then a maximum of £130,000 could be paid into a personal pension by 5 April 2019.
A contribution of this amount would be eligible for a combination of 40% and 45% tax relief for UK tax payers (41% and 46% for Scottish taxpayers). This would also have the added benefit of fully restoring the personal allowance for the year.
Pension relief works by firstly giving basic rate tax relief at source. Therefore, the taxpayer in this example would make a net contribution of £104,000 and HMRC would then top this up by £26,000 to £130,000. The balance of tax relief is then claimed through the individual’s Self-Assessment Tax Return.
Finally, it is worth bearing in mind that you will only be entitled to tax relief on personal contributions up to the level of your relevant earned income for the year (or £3,600 if higher).
Please also visit our other blogs below, in this series
Pension Tax Charges and ‘Scheme Pays’
Already in pension drawdown and want to continue contributing
