Example
Wendy is a deferred member of an occupational pension scheme; she has made no contributions in the past five years as she has been abroad and did not have any relevant UK earnings. In 2023-24 she returns to the UK and has a salary of £250,000.
As Wendy is now a UK resident with relevant UK earnings, she can make contributions using carry-forward, as it is not a requirement to be in the UK in the year you are carrying forward from.
So if someone has spent a period of time overseas they can still carry forward any unused allowance from those years once they return to the UK providing they were a member of a registered pension scheme at some point in the relevant tax years.
Wendy is eligible to carry forward the full unused allowance from the previous three tax years so has an available annual allowance of £180,000.
She can make a gross member contribution at this level – meaning she would be paying in £144,000 and getting £36,000 basic rate relief in the pension – as she also has the relevant UK earnings to be entitled to the tax relief.
Compare this with Tony, who opted out of his workplace pension five years ago but remained a deferred member.
He has relevant UK earnings of £35,000 and has done so for the past five tax years. He inherits £250,000 and wants to maximise his pension contributions.
Tony, like Wendy, is eligible to carry forward the full unused allowance from the previous three tax years so again has an available annual allowance of £180,000.
However, the maximum member contribution Tony can make is limited to his earnings in the current tax year of £35,000.
The fact he had earnings and could have made contributions in previous tax years is irrelevant. Most pension providers will only accept tax relievable contributions.
Employer contributions are paid into the pension gross and are not limited to the member’s earnings.
However, any employer contribution must meet the "wholly and exclusively" test – broadly meaning the employee has to add that value to the business – for the contributions to be deducted as an expense from the company’s taxable profit.
If the annual allowance is exceeded, this will not impact the employer’s ability to claim the contribution as a tax-relievable business expense.
Instead, if the member does not have sufficient carry-forward, they would be liable for an annual allowance charge personally.
There is no requirement to report the use of carry forward to HM Revenue & Customs, only contributions in excess of the available allowance that need to be declared on a tax return.
It is recommended though that comprehensive records are kept where contributions exceed the annual allowance in any given year.
