Using this rule, you are able to carry forward unused annual allowances from up to three previous tax years, which can amount to a substantial sum.
After all, most of us don’t contribute a hefty £40,000 to our pension each year, giving us extra allowance to use over following years, if we wish. You might have some money to spare that could be paid into your pension if, for example, you earn more one year than previously, or have received an inheritance or work bonus.
It is important to remember, however, that you cannot receive tax relief on contributions in excess of your earnings in any tax year, even using the carry forward rule. For example, if you earn £50,000 in a tax year, you can only contribute up to £50,000 to your pension that year, including any carried forward allowance.
If you’ve a large lump sum that exceeds your earnings, one way around this is to spread contributions into your pension over several tax years. Alternatively, you may choose to use carry forward if you make regular payments into your pension, by increasing the amount you pay into your pot on a monthly basis, as well as pay a lump sum into your pension at any time.
Bear in mind you do not need to report additional contributions under carry forward to HMRC, provided you qualify to use this rule, and haven’t exceeded your allowance. If you do contribute more than your overall allowance into your pension, you will pay a tax charge which will claw back any tax relief you received that you were not entitled to. So it’s important to ensure you’re sticking within the rules.