Use it or Lose it: Carry Forward of Unused Pension Tax Relief Allowances for the last 3 years.
Pension Annual Allowance
The maximum you can pay into a pension each year for most working people is usually the lower of:
If you earn £30,000 pa, the maximum you and your employer combined can pay into a pension scheme this year is £30,000.
If you earn more than £40,000 pa e.g., £60,000 pa, the maximum you and your employer combined can pay into a pension scheme this year is £40,000.
In either circumstance, if you have unused pension contributions tax relief, you can carry it forwards by up to three years.
2022/23 – Kuldeep’s salary this year is *£80,000. The maximum that Kuldeep and her employer can pay into a pension for this tax year is £40,000.
2021/22 – Kuldeep earned £70,000 and the combined private and employer pension contributions were £30,000. This means there was £10,000 of unused pension annual allowance from £40,000.
2020/21 – Kuldeep earned £50,000 and the combined private and employer pension contributions were £20,000. This means there was £20,000 of unused pension annual allowance from £40,000.
2019/20 – Kuldeep earned £30,000 and the combined private and employer pension contributions were £10,000. This means there was £20,000 of unused pension annual allowance from £30,000. (Remember pension annual allowance would be capped at £30,000 for this tax year).
In the current tax year, Kuldeep and her employer can pay in combined pension contributions of up to *£80,000. This is made up of:
2022/23 - £40,000 pension contribution and starting with using up the unused pension annual from the oldest year first. You must use up the current year’s allowance before using carry forward
2019/20 - £20,000 unused carry forward pension annual allowance.
2020/21 - £20,000 unused carry forward pension annual allowance.
Total pension contribution of *£80,000 leaving Kuldeep just £10,000 of unused pension annual allowance from tax year 2021/22.
*The pension annual limit for the current tax year plus any unused pension annual allowance and tax relief from the previous 3 years, provided the overall pension contribution does not exceed the total salary for the current tax year and the current tax year allowance is used in full.
If Kuldeep fails to use up the unused pension annual allowance for 2019/20 in tax year 2022/23, she will lose it.
Make sure you make best use of your pension annual allowance and carry forward of the previous 3 years annual allowances to maximum tax relief.