I could do with clarification on the carry forward rules. The guide is that I must have used up my full allowance for the current tax year.

I am taking very low salary as a director of my own business so my earnings are capped at £12,570.

Last year I put the maximum I can personally place into my pension i.e. £12,570 including tax relief. But that still left £47,430 to get up to the £60,000 annual maximum. My company placed further amounts in directly, but still short of the maximum by about £17,000.

So, my question is - have I used my full allowance for the tax year, or does it have to maxed out at £60,000 before I can consider carry forward?

Andrew

Rachel Vahey, AJ Bell Head of Public Policy, says:

How much someone can pay into a pension can sometimes be complicated. As a reminder, there are two different allowances.

The first is on the maximum contributions an individual can make to their pension and claim tax relief. This is capped at the higher of £3,600 or 100% of the pension saver’s relevant UK earnings, including the tax relief.

Very broadly, relevant earnings are earned income or self-employment income, including bonuses, but not including investment income such as dividend income.

KEY POINT TO REMEMBER

The key point to remember when it comes to personal contributions is the maximum contribution which can be made is restricted to the relevant UK earnings in that tax year, regardless of how much annual allowance is available.

The second allowance is the annual allowance, which covers any personal contributions, employer contributions and tax relief. 

Any contributions above the available allowance will suffer a tax charge if carry forward isn’t available.

The standard annual allowance is £60,000, but it could be lower if someone is a very high earner, or has previously ‘flexibly accessed’ their benefits, usually by taking taxed withdrawals from their flexi-access income drawdown plan.

Doing so would trigger the money purchase annual allowance (MPAA) which is £10,000.

If someone doesn’t use all their annual allowance in a tax year, then it might be possible to carry it forward to another tax year to count against contributions paid in then.

However, this doesn’t apply if the MPAA has been triggered. If that’s the case, unused MPAA will just be ‘lost’ once the tax year ends. 

You say last tax year you paid in £12,570, and as you have £17,000 unused annual allowance left (out of your starting £60,000), I am going to assume your employer paid in about £30,430, giving total contributions of £43,000.

You haven’t said what pension contributions you made in the two tax years before that, but I am going to assume you have unused annual allowance from those years as well.

USE UP THE CURRENT YEAR’S ALLOWANCE FIRST

To use unused annual allowance from previous years, you must first use up your annual allowance in the current year. If we assume both you and your employer make the same contributions this tax year, 2025-26, as you did last year, then you will still have £17,000 left over.

To use up this £17,000 your employer contributions could be increased. It’s worth remembering that to be treated as an allowable deduction against profits, pension contributions have to made wholly and exclusively for the purposes of the business.

If the employer contributions were increased by any more than £17,000, then not only would it use up the annual allowance for this year, but any excess could be set against unused annual allowance from previous tax years starting with three tax years ago (2022-23), and once that is used up, moving onto 2023-24 and 2024-25

As an alternative, you could increase your personal contributions but you would have to have the relevant UK earnings to ‘justify’ a higher personal contribution.

For example, if you earned £29,570, you could pay a contribution which, when including tax relief, equalled £29,570. This, in addition to the employer contribution of £30,430, would use up your total £60,000 annual allowance.

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