Are you missing out on tax-free pension contributions?

Are you missing out on tax-free pension contributions?

You might not know it, but you could have unused pension contributions from the last three years. That might not mean you need to change your current financial plan, but it’s worth reading on, because you could be missing out on generous tax incentives. Unused pension allowance from the last three years can be used to:

  • Make further contributions to your pension above the current year’s annual allowance without suffering tax penalties
  • Make tax-efficient investments if you have maximised your ISA allowance

What is the annual allowance?

The annual allowance is a limit on the amount that can be contributed to your UK-registered pension each year, while still receiving tax relief. It’s based on your earnings for the year and is currently capped at £40,000. This includes personal contributions, as well as those from an employer, and the value of any benefits from a defined benefit scheme. Any unused annual allowance from the last three tax years can be ‘carried forward’.

The ‘carry forward’ rule will allow you to make further contributions, and claim money back through your tax return (and depending on the rate of tax you pay, you could benefit from claiming back an extra 20, 40 or 45%) if you have unused annual allowance from the last three tax years.

How does it work?

Let’s say Andy opened his own a restaurant 3 years ago and has slowly been increasing the amount he pays into his pension (and received 20% tax relief on his contributions.) This year Andy has made substantial profits and is considering using the ‘carry forward’ rule to invest further monies (the maximum Andy could invest is £82,500).


However, you can only use ‘carry forward’ if:

  • You have held a pension during the past three years which you intend to use to ‘carry forward’ your annual allowance, even if you haven’t contributed to it
  • Have earnings of at least the amount you are contributing e.g. to contribute £120,000 you must have earnings of at least £120,000 in this tax year


Always consult an expert – due to its complex nature, Wren Sterling strongly advises anyone who is interested in using carry forward to contact their independent financial adviser to avoid the risk of negative tax implications.

This information is based on our understanding of current tax law and pension rules. You should not view any of the information contained within this article as advice. If you’d like to discuss your retirement plan, we’d recommend contacting your independent financial adviser.

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