Making the most of your Annual Allowance (AA)

How to pay more into your pension every year - whilst avoiding an extra tax charge

If you have unused Annual Allowances from previous tax years, they can be 'carried forward'.

To qualify, you must have been a member of a registered pension scheme at some point in the earlier tax years. 'Member' is defined as:

  • an active member
  • a pensioner member
  • a deferred member
  • a pension credit member

Importantly, the above definitions do not mean that contributions or accruals need to have been made in the relevant tax year.

For example: You decide to make a one-off contribution into a registered pension scheme in October 2017, meaning you became a member of the scheme during the tax year 2017/2018. No further contributions were made in the following years. However, because your money is still invested, you're classed as a member of a registered pension scheme in 2018/2019, 2019/2020 and 2020/2021 and can take advantage of the carry forward rule for those previous three tax years.

To use carry forward, your earnings in the three previous tax years are not important as they are not included in the calculations.

The following example shows you how you could make the most of your unused allowances using carry forward:

1. The annual allowance for this tax year (2021/2022) has to be used up first. If the contributions exceed £40,000, carry forward can be used to reduce a tax charge.

2. You then start by using up any annual allowance from the earliest of the three years available. In the current tax year, this will be 2018/2019.

Here’s an example:

The total unused allowance you can carry forward to 2021/2022 is:

£52,000 (£26,000 + 21,000 + £5,000) plus any unused allowance for 2021/2022.

This means you can make a total contribution in 2021/2022 of £92,000 (£52,000 + £40,000).

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