Key Takeaways:
- The pension carry forward rule could allow individuals to use unused pension annual allowance from the past three tax years (provided they’ve used their current year’s allowance and meet eligibility criteria).
- Not all pension providers support the carry-forward rule, so it's important to check with your provider or consult an independent financial adviser for guidance.
- Alternative tax-efficient investment options, such as ISAs, Junior ISAs, or non-tax-efficient accounts, may be worth considering if the carry forward rule doesn't suit your circumstances.
While they may be complex, pensions are designed to be a tax-efficient way to put money aside for your retirement. And if you’re focusing your mental energy and money management skills on putting as much into your pension pot(s) as possible this year, you may have come across the pension annual allowance rules and be worried you’re a little too close to the maximum.
If your contributions will go over the annual allowance, there is a potential solution that you may be able to utilise if your pension provider supports this — the carry forward rule. Read this general guide to see if it’s something that could benefit you and your circumstances.
Note: for transparency, Wealthify can’t facilitate the carrying forward of a pension annual allowance, but we’ve put together this handy guidance to cover this subject.
Jump to:
- Pension annual allowance
- What does carry forward mean?
- Pension carry-forward rules
- Alternative tax-efficient options
- Speak to an independent financial adviser
Pension annual allowance
In every tax year, you’re entitled to put a certain amount of money into your pension and receive tax relief up to an allowance limit.
For most people, this pension annual allowance is £60,000 for the tax year.
However, if you earn less than that amount, you will only receive tax relief on your pension contributions up to 100% of your earnings.
This does include all contributions though, including what you put in, what your employer puts in (if applicable), and any tax relief you get added on (this is 20% for basic rate taxpayers).
For people whose income band is higher or additional you can also claim back further tax relief top-up (20% more for higher rate taxpayers and 25% more for additional rate), but you’d do so by claiming it through a Self-Assessment tax form.
If you’re a much higher earner, something to consider if your threshold income is over £200,000 per tax year, you may be affected by the tapered annual allowance:
If you’re concerned you’ve already gone over the allowance, you can open a new tab to check the Gov.uk’s pension annual allowance calculator here and come back to keep reading about whether the carry forward rule applies to you.
What does carry forward mean?
Whether you’ve found yourself with a windfall this year (for example, a lump sum from an inheritance or insurance payout), or your income has simply levelled up to the point of needing to pay closer attention to how much you can contribute to your pension — it could be in your interest to understand the carry forward rule.
The rule exists to allow people to carry over any unused pension annual allowance from the past three tax years (excluding the current tax year — i.e. 2025/26).
For example:
If someone has come into some inheritance and would like to keep that money in their pension.
They usually earn £100,000 a year, which means their ‘qualifying earnings’ work out as £44,030 (the part of a person’s pay that’s used to calculate their pension contributions under auto-enrolment).
In the past few years, 8% of their ‘qualifying earnings’ went into their workplace pension pot, including a minimum of 3% as their employer’s contribution.
This means £3,522.40 per tax year (£293.53 a month) was contributed to their workplace pension by the individual and the employer, including applicable tax relief on the individual’s contribution [1].
In this instance, it could be possible to carry forward:
- £36,477.60 from 2022/23 (as the annual allowance was £40,000 back then).
- £56,477.60 from 2023/24;
- £56,477.60 from 2024/25;
In order to use carry forward, the current year’s annual allowance has to have been used in full first. The calculation then looks to the earliest of the prior three tax years and moves backwards to the most recent as each is exhausted (in this instance, it would calculate £60,000 in the current tax year 2025/26, then £36,477.60 from 2022/23, and so on).
However, there is a cap in place. In this example, if the person’s earnings remained at £100,000 for the 2025/26 tax year, any carry forward would be capped so that personal contributions in that tax year could not exceed £100,000 in total (including any carry forward used).
So, for this individual, they’d be able to contribute £60,000 in the 2025/26 tax year, £36,477.60 carried forward from 2022/23, and £3,522.40 carried forward from the tax year 2023/24 (a combined £100,000 in total).
Pension carry-forward rules
Here’s what you need to know:
- Only people who are going to use up their pension annual allowance in the current tax year would be eligible to carry forward.
- You would need to have been using a registered pension scheme or a qualifying overseas scheme for each tax year that you want to carry forward (State Pension doesn’t count towards this).
- There are considerations around whether you have a defined benefit pension (also known as final salary or career average scheme, usually seen in public sector roles such as the NHS or fire service), or a defined contribution pension (a more general type of pension scheme, often used for private workplace pensions).
Defined benefit pension annual allowances are calculated based on how much the pension has increased in value over a year, rather than how much was contributed, and your contributions still can’t go above your annual salary [1]. - People who have flexibly taken their benefits from a defined contribution scheme already, which has triggered the ‘Money Purchase Annual Allowance (MPAA)’ you wouldn’t be eligible to use carry forward rule.
- If your provider can facilitate it, the carry forward rule is beneficial for those who are expecting to make a much larger contribution than usual, or those whose earnings fluctuate between each tax year. An independent financial adviser may be able to help you work out if it’s the most necessary step for you.
- Check whether your pension provider can carry forward your previous unused pension allowance. It’s worth checking your existing provider’s policy or getting in touch with their customer service team to confirm.
Not all providers can facilitate this
A further note on point 3, only some providers can offer the carry-forward rule, not all. Wealthify, for example, can’t facilitate the carry-forward rule. This guide is for your general understanding, rather than it being something we can offer.
However, if your current pension provider can facilitate it for you, you can still transfer your pension pot to a better-suited provider at a later date/after your allowance carry forward is complete — just be mindful of any features you might lose, whether transferring would cause you to lose valuable benefits, and any exit fees you might face by doing so.
At Wealthify, we aim to keep all of our fees transparent:
- Wealthify doesn’t charge to transfer a pension in or out, but other providers might do.
- There’s no charge for making deposits or withdrawals either.
- Our platform fees are charged at 0.6% p.a. And this drops to 0.3% p.a. for any portion of your pension pot that’s £100,000 or more. There are fund and trading fees involved with the buying and selling of your investments, which are typically between 0.16% p.a. for our Original Plans and 0.7% p.a. for our Ethical Plans. These do vary, but we negotiate better fees than typically available to keep trading fees as low as possible for you.
Alternative tax-efficient options
If you've read through this guide and think the carry-forward rule might not quite apply to your circumstances after all, that’s not to say you don’t have other options to continue investing tax-efficiently.
While putting a lump sum into your retirement fund is certainly a tax-efficient consideration, it would also mean that money is locked away until retirement age (55 years old, although this is rising to 57 from April 2028). And at that time, usually the first 25% you take out would be tax-free (the remaining 75% taxed at the relevant income tax rate). This might not be the right choice for everyone, so it could be worth you seeking independent financial advice about this.
Asking yourself what your goals are for this money could help work out where to put it.
- Would a Stocks and Shares ISAs be better?
Remember, you get an ISA allowance of £20,000 to spread across any ISAs you’re paying into in that tax year. And no matter how much you build that pot up to, how much compounding interest occurs, or how much gains you make — the whole sum is free from capital gains and income tax.
You could contribute the maximum allowance of £20,000 into an ISA this tax year, do the same in the following tax year so you’ve contributed £40,000, again in the following tax year to make it £60,000, and so on. This allowance is linked to your deposits into the account, not the interest/gains that an ISA builds in the meantime. (Please remember the value of your investments can go down as well as up, and you could get back less than invested.)
While a Cash ISA could be better for short-term savings goals, a Stocks and Shares ISA allows you to invest the money (just as a pension would do) so it’s generally considered an optionfor long-term goals (5-10 years or more).
- Are you hoping to pass some of this money on to your child?
Separate from an adult’s ISA entitlement, children also get a £9,000 tax-free Junior ISA allowance in every tax year. So, if you are already saving for your child and they are under 18, you could do so in a Junior ISA and get to keep more of your own £20,000 ISA allowance for yourself.
The money held in a Junior ISA does belong to the child though and can’t be accessed early by a parent or legal guardian. - After exploring these tax-efficient avenues (ISAs, Junior ISAs, pensions), would investing in a non-tax-efficient account be an option for you?
The capital gains tax-free allowance is currently set at £3,000 a year (£1,500 for trusts) for 2025/26. Meaning, for some people, after they’ve exhausted the avenues of:
- Using their £20,000 ISA allowance;
- Utilising their child’s Junior ISA allowance (if applicable);
- And using up their annual pension allowance.
They could opt to continue investing in an account without tax benefits and allow it to earn up to £3,000 in profits in a tax year (at the time of selling their investments) before needing to declare it to HMRC. There’s also dividend tax to consider, too.
It would really depend on your own circumstances and how much money you have spare. Different financial products have different pros and cons, so speaking to a professional who can advise you would be best.
Speak to an independent financial adviser
Remember, if you’re ever in doubt about technical decisions regarding your pension, speak to a specialist.
Wealthify doesn’t offer financial advice, but sitting down with someone qualified who can go through your pension paperwork should be able to help — an Independent Financial Adviser should be able to offer you a range of products, decisions, and detailed information on carry-forward rules and whether they apply to you.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
Wealthify does not provide advice. If you’re not sure whether investing is right for you, please speak to a financial adviser.
