Carrying forward previously unused pension allowance to use this year
Previous years unused pension allowances can be carried forward so you can exceed the £40,000 tax free limit this year.Tue, 08 Dec 2020
In the 2019/20 tax year, you are able to place up to 100% of your salary or £40,000 (whichever is lower) in to a pension, tax-free.
If you have exceeded your limit for this year, or intend to next year, you should have a look at your three previous tax returns. Has the £40,000 limit been reached in 2019/20, 2018/19 and 2017/18? If not, you may be able to carry forward any unused allowance to be used in the current tax year. In that case you may only have to pay tax on any amount of pension savings in excess of the £40,000 plus any unused allowances carried forward from previous three years. This potentially allows contributions in a tax year of up to £160,000, but tax free contributions are capped at 100% of relevant U.K. earnings and you must use up this year’s allowance in full first
The £40,000 tax-free allowance changes once your total taxable income is more than £150,000- then the allowance decreases – this is known as tapered annual allowance. As an example. for 2019/20, if your total income is £160,000, then your annual allowance is £35,000. If your total income reaches £210,000 then you will have a tax-free pension allowance of £10,000.
The Annual Allowance has been increased for next year (2020/21). It will be tapered for those with an income of over £240,00, instead of the previous £150,000. So for every £2 of adjusted income over £240,000, an individual’s annual allowance is reduced by £1. The minimum annual allowance will now be £4,000, instead of the previous £10,000.
There are restrictions with regards to what kind of pension you contribute to in order to be able to do this, such as you must be part of a registered pension scheme.
HMRC have more information pension allowance using up your unused pension contribution allowances including a calculator to work out if you have any unused allowances.