The Chancellor made some major changes to the pension rules in the March Budget, and one key amendment has made using something called ‘Carry Forward’ rules much more beneficial for pension savers.
How does Carry Forward work?
The Carry Forward rules allow you to use up any unused pension allowance from the last three tax years in a single year, which can give a big boost to your pension pot. There is a limit on the maximum amount you can put into your pension each tax year and receive tax relief. For the last three tax years prior to 2023/24 the annual allowance has been £40,000. However, the Chancellor raised this allowance for this tax year to £60,000.
What does this mean for me?
If you haven’t used your entire £40,000 annual allowance for the last three years – 2020/21, 2021/22 and 2022/23 – then you can make additional contributions this year to use up any remainder of the £120,000 worth of contributions you could have made during that period.
Let’s say you made £20,000 worth of contributions in each of these tax years. This would leave £60,000 of the remaining allowances you can now ‘carry forward’. Remember, this figure includes tax relief at your highest level from the taxman. If you are a 40% taxpayer, for example, then adding £40,000 to your pension would cost you just £24,000 with the remaining £16,000 being added by HMRC from the tax you would pay for that year.
You also have a £60,000 annual allowance for the 2023/24 tax year. If you hadn’t put anything into your pension for the previous three years, then this year you could add £180,000 in one go, providing you earn enough to do this. HMRC won’t give you more tax relief in a single year than the tax you have to pay. You would need to earn at least £180,000 this year to qualify for this much tax relief.
If you can’t use all of your allowance for this year, then you can always use the Carry Forward rules next year.
Don’t I have to be careful how large my pension pot gets during my lifetime?
Well, there is still theoretically a Lifetime Allowance of £1,073,100 which was the maximum you could have in your pension fund before you were hit with charges as high as 55% on amounts over this limit. But during the Budget, the Chancellor removed the penalty on this Lifetime Allowance, meaning there is no problem now for breaching it. Legislation is needed to remove the limit completely.
The change applies from April 6 this year. The only thing you can’t do is take more than £268,275 as your tax-free lump sum no matter how big your pension pot gets – which is 25% of the current Lifetime Allowance.
We can help you
Using Carry Forward is a great way to catch up on pension contributions you didn’t make in previous years. It can be especially useful if you are getting close to retirement and want to put more into your pension. If you want to explore Carry Forward, please get in touch and we will be happy to help.