Key Takeaways

• The £220,000 Opportunity: In the 2025/26 tax year, a person with no previous contributions but an existing pension scheme could theoretically contribute up to £220,000 in a single year using Carry Forward.
• The “Reach Back” Rule: You can utilize unused allowances from the previous three tax years (2022/23, 2023/24, and 2024/25), provided you were a member of a registered pension scheme during those years.
• The April 5th Expiry: On April 6th, 2026, any unused allowance from the 2022/23 tax year disappears forever. February is the time to calculate and act.
• Tax Relief at 45%: For those earning over £125,140, pension contributions are the most effective way to “buy back” your personal allowance and secure 45% tax relief.
• Worcester Business Impact: For local limited company directors, employer pension contributions can be treated as an allowable business expense, significantly reducing Corporation Tax while building personal wealth.

What is Pension Carry Forward?

Most UK taxpayers are limited by the Annual Allowance, which is the maximum you can save into your pension each year while still receiving tax relief. For the 2025/26 tax year, this is £60,000.

However, the “Carry Forward” rules allow you to make use of any unused allowance from the previous three tax years. To qualify, you must:

1. Have used your full £60,000 allowance for the current 2025/26 year first.
2. Have been a member of a registered UK pension scheme during the years you are carrying forward from (even if no contributions were made).

The 2026 Deadlines

As shown in the table below, the allowance was lower in 2022/23. February is your last chance to claim that £40,000 limit before it expires on April 5th.

The High-Earner Benefit: Reclaiming Your Personal Allowance

In 2026, the Personal Allowance (the amount you can earn tax-free) remains frozen at £12,570. However, for every £2 you earn over £100,000, you lose £1 of that allowance. This creates a “60% tax trap” for earnings between £100,000 and £125,140.

Why Pensions are the Solution

By making a large pension contribution using Carry Forward, you reduce your “Adjusted Net Income.” If you bring your income back below the £100,000 threshold, you effectively:

• Receive 40% or 45% tax relief on the contribution.
• Reclaim your full Personal Allowance, potentially saving another £5,028 in tax.

A Strategic Move for Worcester Business Owners

If you run a limited company in the Worcester area—perhaps based in the Worcester Six Business Park or the city centre—you have a unique advantage.

Instead of paying yourself a high dividend (which attracts personal dividend tax) and then making a personal pension contribution, your company can make an Employer Contribution directly into your pension.

• Corporation Tax Relief: The contribution is usually treated as a business expense, reducing your company’s taxable profit.
• No National Insurance: Neither you nor the company pays NI on the contribution.
• Immediate Wealth Transfer: You effectively move gross profits from the business directly into your private wealth wrapper.

The Tapered Annual Allowance Warning

If you are a very high earner, your Annual Allowance may be “tapered.” For the 2025/26 tax year, if your “Adjusted Income” is over £260,000, your allowance is reduced by £1 for every £2 of income, down to a minimum of £10,000.

Carry Forward still applies to tapered individuals, but you can only carry forward the unused part of your specific tapered allowance from those years. This calculation is complex and is a primary reason to seek professional advice in February before the year-end rush.

The “Relevant Earnings” Limit

While Carry Forward allows you to exceed the £60,000 limit, personal contributions are still limited by your Relevant UK Earnings in the year the contribution is made.

• Example: If you have £100,000 of unused allowance but only earn £80,000 this year, your personal contribution is capped at £80,000.
• The Exception: Employer contributions (as mentioned in section 3) are not limited by your salary, only by the Annual Allowance and the “wholly and exclusively” rule for business expenses.