Online Services:


Increase to the Annual Allowance


On 6 April 2023, the pensions annual allowance increased from £40,000 to £60,000 a year. Together with the removal of the lifetime allowance charge, many high net worth individuals will now be considering whether large pension contributions could be a tax efficient way to invest their wealth. 

Some of these people will be able to make pension contributions of up to £180,000 without incurring an annual allowance tax charge. This is because carry forward rules allow unused annual allowance to be used (carried forward) up to three tax years later. This means the £60,000 allowance for 2023/24 can be contributed, plus a further 3 x £40,000 of unused allowance carried forward from the 2020/21, 2021/22 and 2022/23 tax years. 

To use carry forward, the full £60,000 allowance for 2023/24 will first need to be used in full. Carry forward then works on the basis of the unused allowance from the oldest of the last three tax years (i.e. 2020/21) being taken first. 

Carry forward rules

For some people, there are a number of reasons that it won’t always be possible to make large pension contributions utilising carry forward. This is because they are affected by one or more of the following: 

  • Relevant UK earnings – To receive tax relief on member (including any third party, other than employer) contributions, an individual must have sufficient relevant UK earnings within the tax year in which the contribution is made - carry forward of past years earnings is not possible and dividend income does not count! (note that sufficient relevant UK earnings are not required for employer contributions, which are controlled by the ‘wholly and exclusively’ rules)*. 
  • Past membership of a registered pension scheme - To carry forward any unused annual allowance to the current tax year, the individual must have been a member of a registered pension scheme at some point in the previous tax year concerned.
  • Money Purchase Annual Allowance (MPAA) – Where someone has flexibly accessed their pension, they will likely have triggered the money purchase annual allowance (MPAA). This limits money purchase contributions to £10,000 a year without incurring a tax charge. Where the MPAA has been triggered, carry forward can only be used in respect of a defined benefit arrangement (calculated by reference to the ‘alternative annual allowance’).
  • Tapered Annual Allowance (TAA) – Individuals will be subject to the tapered annual allowance when threshold income in the current tax year is above £200,000. For 2023/24, the TAA reduces the annual allowance by £1 for every £2 of adjusted income between £260,000 and £360,000. This means that the tapered annual allowance can now not be reduced to less than £10,000. 
    For those subject to the TAA, carry forward is available. This means that in a few cases, pension contributions can be used to reduce threshold income below £200,000 and avoid the TAA altogether. However, those affected by the TAA will often have been high earners in earlier tax years, meaning that they may have less AA available to carry forward due to the taper in those years**. 

* Member contributions to a Relief at Source (RAS) scheme are restricted to the maximum of 100% of the individual’s Relevant UK Earnings for tax relief purposes. Member contributions above this level, for which there may sufficient unused annual allowance, will not be eligible for tax relief and would need to be paid gross. However, many RAS schemes will not allow member contributions above the level that qualify for tax relief. Employer contributions are often the most common way of using up unused annual allowance through carry forward.  

** Note that for tax years 2020/21, 2021/22 and 2022/23, the taper began when threshold income exceeded £200,000 and adjusted income was more than £240,000. The tapered annual allowance could previously be reduced to a minimum of £4,000.

Example – Cristian 

Christian is self-employed and has been a member of a registered pension scheme since August 2018. The nature of his work means that his annual income can vary significantly, affecting how much he pays into his pension. He has recently started a lucrative job and will earn £360,000 in 2023/24. Christian is now considering how much to contribute to his pension.

Over the last 3 tax years, he has earned and contributed the following amounts:

Tax Year


Pension Contributions

Unused Annual Allowance

Earnings (net of contributions)






















* Since 2020/21, the tapered annual allowance begins when threshold income exceeds £200,000 and reduces the annual allowance by £1 for every £2 of adjusted income above £240,000. The tapered annual allowance could not be reduced to less than £4,000.

** From 6 April 2023, the tapered annual allowance begins when threshold income exceeds £200,000 and adjusted income is more than £260,000. The tapered annual allowance can now not be reduced to less than £10,000.

The current position

Christian is currently subject to the tapered annual allowance, as both his threshold income and adjusted income are £360,000. Since his adjusted income is £100,000 above the £260,000 starting point, this means his annual allowance for 2023/24 is reduced by £50,000 (£100,000/2) to £10,000 (the maximum reduction). 

However, Christian does have £90,000 of unused annual allowance available from the previous three tax years available. Using carry forward, Christian can therefore contribute £100,000.

An Alternative option

Christian may wish to consider making a larger contribution of £160,000. A £160,000 pension contribution would reduce his threshold income from £360,000 to £200,000, which would mean he is no longer subject to the TAA. 

Avoiding the taper would increase his annual allowance for 2023/24 from £10,000 to £60,000. Adding the £90,000 of carry forward available, he now has £150,000 of available annual allowance. This means that only £10,000 of the £160,000 will be subject to an annual allowance tax charge.

The annual allowance charge is based on the tax relief available on the pension contribution. As Christian is an additional rate (45%) tax payer, the tax charge on the £10,000 excess will be £4,500 (45%). However, Christian can ask the pension scheme to pay this on his behalf using scheme pays

Christian will need to weigh up whether the benefits of paying an additional £60,000 into his pension is worth incurring a £4,500 annual allowance tax charge. Factors to consider will include his future tax free cash entitlement, the rates of tax he expects to pay in retirement, the tax advantages of investing within a pension wrapper and the ability to shelter pension assets outside of his estate. 


The annual allowance and the availability of carry forward can be complicated. Furthermore, the ‘money purchase annual allowance’ and ‘tapered annual allowance’ can make this area even more problematic. 

HMRC do provide an annual allowance calculator that can help with this. However, at the time of writing, this has not yet been updated for the 2023/24 tax year.  

Important Information

Please note this is for general information only and is based on LV=’s understanding of the relevant legislation and regulations and may be subject to change.

The tax treatment of benefits depends on individual circumstances, and may be subject to change in the future.

The use of this document is at your own risk, and the content should not be used for the provision of professional advice.

LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.