Most of us understand the benefits of investing tax efficiently. Using the tax allowances, such as ISAs, provided by the government each year means we can avoid paying unnecessary tax. However, many of us are missing out on the valuable tax savings available through our pensions.
Pensions are one of the most tax-efficient ways to save for your retirement. If youโre a UK taxpayer, in the 2024/25 tax year you can get tax relief on pension contributions of up to 100% of your earnings or a ยฃ60,000 annual allowance, whichever is lower. In simple terms, the tax relief you receive on pensions means some of your money that would have gone to the government as tax goes into your pension instead.
The current rates of fluctuating inflation mean that any savings you hold in cash are at risk of losing their value over time, you could consider investing additional lump sums. Redirecting any savings into your pension may mean you will be able to enjoy more of the good things in life when the time comes to retire.
Alternatively, some of us have seen our income reduce during the last couple of years and have seen increased expenditure due to the cost of living crisis, which has affected our existing financial commitments. For example, having to reduce contributions to our pensions. If you are self-employed, your income will almost certainly vary from year to year, sometimes reducing the amounts you can contribute to your pension and your allowable tax reliefs.
Carry forward
However, whether you find yourself with more, or less to save, you can take advantage of any unused allowance from the previous three tax years, subject to allowances and limits. This is commonly referred to as โcarry forward reliefโ.
Carry forward allows unused annual pension allowances from previous tax years to be carried forward and added to the annual allowance for the current tax year.
The example below shows how you could benefit. Considering the annual allowance was previously ยฃ40,000, there is ยฃ70,000 unused annual allowance from the previous three years. Added to the ยฃ60,000 annual allowance, ยฃ130,000 could be contributed to the pension and receive tax relief in the 2024/25 tax year.
| Tax year | Annual allowance | Total contribution | Unused allowance |
| 2021 โ 22 | ยฃ40,000 | ยฃ10,000 | ยฃ30,000 |
| 2022- 23 | ยฃ40,000 | ยฃ30,000 | ยฃ10,000 |
| 2023- 24 | ยฃ60,000 | ยฃ30,000 | ยฃ30,000 |
However, unless you run your own limited company, your earnings must be at least equal to the amount that you are looking to contribute at that point. So, in this example, to contribute ยฃ130,000, you would also have to earn at least that much in the current tax year.
How we can help
Carry forward can be a valuable way of ensuring you donโt miss out and pay unnecessary tax. Whether thatโs because you have additional savings to invest in your pension, or you need to temporarily reduce your financial commitments and would like to benefit in the future.
Have any questions? Weโd be delighted to share more, please get in touch.
Tax treatment varies according to individual circumstances and is subject to change.
