Carry forward is a great little rule for those who can pay a lump sum into their pension (Image: Getty)
Everyone has an annual pension allowance, the amount they can pay into their retirement savings without having to pay . This is different from other savings allowance such as the ).
For the financial year ending April 5 2024 that amount is £60,000 and means someone can put this into their pension and, if they have already paid tax on it, will get a rebate.
They can do this by declaring the payment on their , via the self assessment system and the money will be refunded back into their bank account.
But there is a little-known rule that allows taxpayers to backdate this allowance, which means they may be able to put more money into their pension, and pay less tax.
They can do this as long as they earned enough in the previous three years.
The rule is called carry forward and is a useful tool if someone’s financial circumstances has changed.
Clare Moffat, pensions and legal expert at Royal London, said carry forward allowed self employed Brits to backdate their pension contributions:
For example they may have made a profit but the business had only started so they needed to put money bakc into their companyr pension
It could also be used by women who have gone back to work after maternity leave and want to make up their pension contributions, or after a career break when they may have taken more time off work to look after young children
It may also be suitable if someone has paid off their and still has a few years left until retirement and can now afford to maximise their annual allowance.
If you have a lump sum, then you can use carry back but you will need to have earned £60,000 income to use the maximum allowance.
For example if you want to backdate pension contributions this year plus the three years to the tax year 2021/22, 2022/2023 and 2023/24 and earned £32,000 that year they would only get tax relief on £32,000 for that tax year.
If they have already put in £3000 into their pension in that year there will be £29,000.
You can choose to pay more into your pension, but you will not get tax relief on the amount above your annual allowance
Moffat said: “If your earnings are lower than £60,000 you’ll be entitled to tax relief only up to the amount you earn.”
On the lower end, clients who earn less than £3,600 a year can pay in up to £2,880 over the last few years and still get tax relief.
In the March 2023 budget the annual allowance was increased from £40,000 a year to £60,000.
The £60,000 limit only applies to 2024/25 and 2023/24 so anyone wanting to use carry forward for the full previous three years 2021/22 or 2022/23 – will have a maximum annual allowance of £40,000.
The most they could put into a pension – and get tax relief would be £200,000, so two times £40,000 plus two times £60,000
IF you have already started to take your pension then different rules will apply because imposes a money purchase annual allowance so you cannotput more than £10,000 into their pension, unless they are still paying into a defined benefit scheme, in which case they keep the £60,000 allowance for that scheme.