The financial planning journal

Carry forward – an industry secret to make up to £32,000

2 March 2021

Have you been failing to maximise your pension contributions each year? Well, you could make up to £32,000 by using a little industry secret called carry forward!

Before I explain how you can do this, it’s important to cover something known as the annual allowance:

The annual allowance is the total amount you can put into your pension each tax year. It’s currently a sizeable £40,000 or your total income, whichever is lower. However, it’s important to remember that this includes both your personal contributions and the contributions your employer makes. If you go over your allowance, you’ll be subject to a charge at the end of the tax year.

I should also highlight that this allowance can taper down fairly dramatically, if you earn over £240,000. However, if you are earning this much, you should probably be working with a financial planner anyway.

This £40,000 pension allowance might sound like a lot but you can actually get even more into your pension by using ‘carry forward’.

If you have used up your current year’s pension allowance, you can look back over the past three years for any allowance you did not use and contribute this to your pension.

As such, if you were earning enough, it would theoretically be possible to put £128,000 into your pension in a single tax year.

The 20% in relief, received from your pension provider, turns this £128,000 into £160,000. You’ll also be able to claim higher and additional rate tax relief on your return, so you can effectively save an additional £32,000 in relief.

Now there are some nuances here that can impact just how much you can put into your pension in a single tax year – the previous tax year rules surrounding the annual allowance and how much you earn for example. However, these figures should simply highlight the impact carry forward can have.

Carry forward could be particularly relevant if you have received an inheritance or a large bonus and want to magically turn it into more money. The larger the amount, the greater the potential to save in taxation.

At the end of the tax year, do keep an eye on how much you’ve contributed in the last three years, as your opportunity to make use of carry forward changes with each year that passes. I’d also suggest taking advice before using this method as there are several complexities to consider.

So, if you want the chance to make some immediate free money, even as much as £32,000, see whether you can use carry forward this tax year.

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