01

The mechanics of carry forward — precisely how it works

Carry forward allows the unused portion of the annual allowance from the three previous tax years to be added to the current year's annual allowance. The annual allowance for each year is: 2023/24 = £60,000; 2024/25 = £60,000; 2025/26 = £60,000; 2026/27 = £60,000. Total maximum carry forward pool from three prior years = £180,000.

Conditions for carry forward: (1) you must have been a member of a registered pension scheme in each tax year from which you carry forward — membership means having any arrangement under the scheme, even if dormant, not necessarily making contributions; (2) carry forward is used in chronological order from the oldest year first; (3) the current year's annual allowance of £60,000 must be used in full before any carry forward allowance is drawn on; (4) personal pension contributions are capped at 100% of relevant UK earnings in the contribution year — but employer contributions are not.

Example calculation: an individual who contributed £10,000 per year in 2023/24, 2024/25 and 2025/26 has used £30,000 of allowances in three years, leaving £150,000 of carry forward unused (£50,000 per year). In 2026/27 they can contribute: £60,000 (current year) + £50,000 (from 2023/24) + £50,000 (from 2024/25) + £50,000 (from 2025/26) = £210,000 — but capped at £180,000 total because the maximum carry forward pool is £180,000 (three years × £60,000 maximum per year).

02

Who benefits most — and the earnings constraint

Carry forward provides the greatest benefit to individuals who have had variable income over the carry forward period — typically business owners with fluctuating profits, employees receiving large one-off bonuses or share awards, and professionals who have recently experienced significant income increases.

The earnings constraint is critical and frequently misunderstood. Personal pension contributions (including relief at source) cannot exceed 100% of relevant UK earnings in the contribution year — regardless of how much carry forward allowance is available. Relevant UK earnings includes employment income, self-employment profits and certain other earned income but excludes dividends, rental income, savings interest and pension income.

For a director taking £12,570 salary and £80,000 dividends: relevant UK earnings = £12,570. Personal pension contributions are capped at £12,570, regardless of carry forward. The director cannot contribute £60,000 personally just because carry forward is available — dividends do not count as earnings.

The solution for directors: employer contributions. Employer contributions to a registered pension scheme are not subject to the 100% earnings cap. A company can make employer contributions of up to the full annual allowance (including carry forward) regardless of the director's salary level, provided the contributions meet the 'wholly and exclusively' test for corporation tax deduction purposes. A director who personally cannot contribute more than £12,570 can have the company contribute £167,430 on their behalf in 2026/27, using the full carry forward allowance — total pension input = £180,000.

03

Defined benefit schemes and the pension input amount

Members of defined benefit (DB) pension schemes must calculate their pension input amount (PIA) for each year — this is the value attributed to DB accrual for annual allowance purposes and can be significantly higher than the actual contributions made.

The PIA for a DB scheme is calculated as: (closing accrued pension - opening accrued pension) × 16, plus any increase in tax-free lump sum. For a teacher who accrued £2,000 of additional pension in 2025/26 (one year's accrual in a final salary scheme), the PIA is £2,000 × 16 = £32,000 — not the actual contribution paid into the scheme. If the teacher's total DB PIA is £32,000, their available carry forward from 2025/26 is £60,000 - £32,000 = £28,000.

NHS consultants and GPs are disproportionately affected. The NHS pension scheme's generous accrual rates mean PIAs can be substantial — some senior consultants have PIAs above £60,000 in a single year, meaning they breach the annual allowance and face a charge even without making any personal contributions. These members typically have minimal or no carry forward available — and may already be facing annual allowance charges.

The lesson: never assume carry forward is available without calculating the PIA for each year from all pension schemes. DB members who also hold a SIPP or workplace DC pension must aggregate the PIA from all schemes against the annual allowance.

04

How to make the contribution — SIPPs, workplace pensions and employer contributions

The mechanics of a carry forward contribution depend on whether the contribution is personal (subject to the earnings cap, benefits from relief at source or net pay) or employer (no earnings cap, subject to the 'wholly and exclusively' test, deductible for corporation tax).

For personal contributions via a SIPP (self-invested personal pension): the individual contributes a net amount (the gross contribution minus 20% basic rate relief). For a £50,000 gross contribution: the individual pays £40,000 into the SIPP. The SIPP provider claims £10,000 basic rate relief from HMRC and adds it to the pension. The remaining £10,000 higher rate relief (or £15,000 additional rate relief) is claimed via self-assessment. Total gross pension funding: £50,000. Net cost: £30,000 for a higher rate taxpayer, £27,500 for an additional rate taxpayer.

For employer contributions: the company pays the gross amount directly to the pension scheme. No relief at source — the company simply claims the payment as an allowable business expense in the corporation tax computation for the accounting year in which it is paid. For an employer contribution of £100,000, the corporation tax saving is £25,000 (at 25% corporation tax rate). Net company cost: £75,000 to fund a £100,000 pension.

Timing for employer contributions: the contribution is recognised for corporation tax relief in the accounting period in which it is paid. For a company with a March 2027 year end wanting to claim relief in 2026/27, the employer pension contribution must be paid by 31 March 2027. Contributions paid one day late — after the accounting year end — fall into the following year's tax return.

05

Carry forward and the April 2027 pension IHT deadline

From April 2027, unused pension funds will be brought into the inheritance tax net for the first time. Under the current rules, pension funds pass to nominated beneficiaries entirely outside the estate — no IHT, and potentially at the beneficiary's income tax rate if they draw the funds. From April 2027, the pension fund will be included in the taxable estate and subject to IHT at 40% before any residual is paid to beneficiaries.

This creates a defined deadline for carry forward planning. Maximising pension contributions before April 2027 using carry forward achieves two simultaneous benefits: income tax relief at up to 45% on the contribution (immediate return of 45p for every £1 contributed for additional rate taxpayers); and IHT efficiency on the resulting pension fund before the April 2027 rule change brings pensions into the IHT net.

For a higher rate taxpayer with £100,000 of carry forward allowance available in 2026/27: contributing the full £100,000 before April 2027 saves £40,000 in income tax relief and shelters the resulting £100,000 pension fund from IHT (saving a further £40,000 if the estate is taxable) — a combined tax saving of approximately £80,000 on a £60,000 net contribution. After April 2027, the IHT efficiency of pension contributions diminishes significantly for those with taxable estates.

Draft regulations for the April 2027 pension IHT change have been published by HMRC for consultation. Final rules may differ in detail — monitor HMRC guidance through late 2026 and take specialist advice before making decisions purely on the basis of the April 2027 deadline.