What do the Budget changes mean for pensions ‘carry forward’? Will I be able to contribute more to my pension using carry forward in 2023/24? I earn just over £100,000 a year and contributed approximately £20,000 a year to my pension in each of the last three tax years.

Anonymous

Tom Selby, AJ Bell Head of Retirement Policy, says:

UK pension savers are entitled to an overall ‘annual allowance’ for pension contributions each tax year, covering personal contributions, tax relief and employer contributions. In 2022/23, that annual allowance is set at £40,000, but in 2023/24 it will increase to £60,000.

In addition, your personal contributions are limited to 100% of your UK earnings. That means someone earning £30,000 in 2022/23 can personally pay in a maximum of £24,000 with £6,000 tax relief during that tax year. Employer contributions can be on top of this.

If you exceed your annual allowance, an annual allowance tax charge will be levied by HMRC. Effectively the excess amount is added to your taxable income for the year and income tax charged accordingly. For example, if you are £10,000 over your allowance and your income is £80,000 a year you will be charged tax at 40% as this is the rate you would pay on income between £80,000-£90,000.

To give pension savers extra flexibility, ‘carry forward’ rules allow you to use unused annual allowance from the three previous tax years to boost your contributions in the current tax year.

Chancellor Jeremy Hunt’s decision to increase the annual allowance to £60,000 from 6 April means, taken to its limit, carry forward could allow someone to make a £180,000 pension contribution in 2023/24 without being hit with an annual allowance tax charge. This would comprise their £60,000 annual allowance for 2023/24 plus three chunks of £40,000 annual allowance from 2020/21, 2021/22 and 2022/23.

Carry forward can be particularly useful for business owners or anyone who is trying to make up for lost time saving for retirement.

WHAT ARE THE RULES?

To carry forward unused annual allowance from a prior tax year, you need to have been a member of a pension scheme during that year.

Your personal contributions also remain restricted to 100% of your earnings during the current tax year – so if your earnings are £100,000, that is the maximum you can pay in. Though this doesn’t cover employer contributions.

The maximum you can carry forward from any given tax year will be determined by your annual allowance in that tax year. This means if you were a very high earner affected by the annual allowance ‘taper’ in any of the years you are carrying forward from, this will be the most you can carry forward from that year.

For example, if in 2022/23 the taper reduced your annual allowance from £40,000 to £4,000, the most you could carry forward to 2023/24 would   be £4,000.

Finally, if you have triggered the ‘money purchase annual allowance’ by taking a flexible withdrawal from your pension, you are barred from using carry forward in a defined contribution pension, like a SIPP. The main things that count as a flexible withdrawal are taking taxable income via flexi-access drawdown or a taxable ad-hoc lump sum direct from your pension.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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