Understanding pension tax relief
Most UK taxpayers receive tax relief from the government when they contribute to their pensions. For every £100 you pay into your pension HMRC adds a £25 tax top up. As tax relief is equal to income tax, higher and additional rate taxpayers can claim a further 25% and 31% top up through their Self-Assessment tax returns.
You can receive pension tax relief on any contributions you make, up to 100% of your salary, capped at £60,000 gross for 2024/25. This amount is known as the annual allowance and any contributions that you make over this limit are taxed at your highest rate.
How pension carry forward works
If you use up all of your annual allowance in one year, it’s possible to contribute more to your pension with unused allowances from previous years and still receive tax relief. You can carry forward unused annual allowances from the three previous tax years, starting with the earliest which would be 2021/22. Claiming tax relief on pension contributions for previous years is relatively straightforward as long as you were a member of a pension during that time.
One of the key pension annual allowance carry forward rules is that you can’t receive tax relief on contributions in excess of your earnings in any tax year. For example if a person earns £80,000 in a tax year, they can only contribute up to £80,000 to their pension that tax year. No matter how much unused allowance they have remaining from the previous three years, they can only bring forward £20,000 so that their pension contributions equal their annual salary.
Claiming tax relief for previous years is particularly useful if your income changes from year to year, which can happen if you’re self-employed, for example. It’s also the most tax-efficient way to pay a lump sum into your pension.
Using your annual allowance
The amount of pension annual allowance you can carry forward will depend on how much you used in the previous three tax years. These allowances must include the total value of the contributions you make to your pension, any made by your employer, plus the tax relief you’ve received from HMRC.
| Year | Amount |
|---|---|
| Personal allowance 2024/25 | £60,000 |
| Personal allowance 2023/24 | £60,000 |
| Personal allowance 2022/23 | £40,000 |
| Personal allowance 2021/22 | £40,000 |
The tapered annual allowance
A new tapered annual allowance came into force for high earners on 6 April 2016 and affects how much pension tax relief they can claim. If your adjusted income (your income plus pension contributions) is over £260,000 your annual pension tax relief limit is reduced. For every £2 of income you earn above £260,000 a year, you’ll lose £1 of your annual allowance. The maximum reduction is £50,000 meaning that anyone earning over £360,000 will have their annual allowance capped at £10,000.
Save into your pension with PensionBee
Open a PensionBee plan and you can easily save money into your pension by setting up regular or one-off contributions online through the contributions tab.
Join PensionBee now and take control of your pension saving.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 06-04-2024
