Archived article: This article was correct at the time of publishing. Tax, investments and pension rules can change over time so the information below may not be current.

Keep calm and ‘Carry Forward’

Higher earners should mop up unutilised pension allowances while reliefs remain generous

David Smith David Smith
12 February 2015

With a UK General Election looming and Labour committed to cutting the level of tax relief on pension contributions for “the very highest earners to the same rate as the average tax payer” the days of effective relief on pension contributions at 40% or 45% could be numbered.  

For those subject to the higher rates of Income Tax, investing in a pension is particularly attractive at the moment as contributions are deducted from their earnings when assessing tax, resulting in a tax saving at their marginal rate. It is estimated that some 2 million more people will have been drawn into the higher tax bands over the life of this parliament.

This means that someone with total earnings of £190,000 (from salary, bonuses and other sources of taxable income) that utilises the maximum annual gross pension contribution allowance this year of £40,000 could deduct £40,000 from their earnings and only pay Income Tax on £150,000, the level at which the very highest tax band (45%) kicks in. In doing so they would effectively eliminate their entire 45% tax liability.

In another example, someone with total earnings of £120,000 who paid a contribution of £20,000 (gross) from their earnings would receive an effective rate of tax relief of 60% due to the fact that they would retain the personal allowance they would have otherwise lost.

Keep calm and ‘Carry Forward’

Some investors may be able to further reduce their potential tax liability this year if they did not fully utilise their annual pension allowances in the three previous tax years when the maximum gross pension allowances was at a higher level of £50,000 per year. This is because of a rule known as ‘Carry Forward’* which allows investors to sweep up unused allowances for the three years since 2011/12, but importantly they can deduct these from current tax-year earnings.

While personal pension contributions cannot exceed 100% of earned income, employer contributions can exceed 100% of earned income but are still subject to the annual pension allowance limits.

For someone who has not used any of their annual pension allowances in the previous three years, the maximum contribution this year could be £190,000. For anyone earning £340,000 or more, the net cost after 45% relief of the contribution would be £104,500.

In the example below, the investor is eligible to firstly use their £40,000 pension allowance for the current tax year but also  ‘Carry Forward’ unused allowances of £110,000 from the previous three years, leading to a total maximum contribution of £160,000. Assuming the investor earns £300,000 or more, this would require an actual payment of £128,000 into the pension (£160,000 net of 20% tax relief) followed by a tax refund from HM Revenue & Customs of £40,000. In this example, for the investor the net cost of the £160,000 pension contribution would therefore be just £88,000.


Amount Contributed

Carry Forward










Wealth taxes are firmly on the radar of the political parties. While proposals for a ‘Mansion Tax’ have dominated the headlines in this respect, a reduction in pension tax reliefs for higher earners is a serious possibility whatever the outcome of the election. With pensions about to enjoy much greater flexibility, higher earners in a position to make significant contributions should strongly consider doing so while reliefs are available at currently generous levels.

* ‘Carry Forward’ is a complex area. For more information please contact one of our financial planners by emailing us or calling us on 020 7189 2400.

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Please note we do not provide tax advice.