Pension carry forward — what company directors need to know June 24, 2026 Kieron McGahan Post in Uncategorized Pension carry forward — what company directors need to know Most directors are aware that there is an annual allowance on pension contributions — currently £60,000 for 2026/27. What is less well known is that unused allowance from the previous three tax years can be carried forward and added to this year’s limit. For directors who have not been paying regularly into a pension, this can open up a significant funding opportunity. How carry forward works If you have not used your full annual allowance in previous years, the unused balance does not simply disappear. It can be carried forward and used in the current tax year, on top of your current year’s allowance. For contributions made in 2026/27, the carry forward years and their standard allowances are: Tax Year Standard Annual Allowance 2023/24 £60,000 2024/25 £60,000 2025/26 £60,000 Unused allowance expires after three years if not used. The current year’s allowance must be used in full before any carry forward can be applied, and unused years are drawn on oldest first. You must also have been a member of a UK registered pension scheme during any year from which you are carrying forward — though you do not need to have made contributions in that year. Why employer contributions matter for directors This is where the position for company directors differs from employed individuals. Personal pension contributions that attract tax relief are generally limited to the lower of the available annual allowance and relevant UK earnings. Dividends do not count as relevant earnings. A director taking a modest salary and drawing the remainder as dividends may find that personal contributions are limited by their salary alone — regardless of the carry forward available. Employer contributions work differently. Where the company pays directly into the director’s pension: The contribution is not restricted by the director’s salary level. The company may be able to claim Corporation Tax relief, subject to the wholly and exclusively test (see below). The contribution still counts against the director’s annual allowance and carry forward position. For many owner-managed businesses, employer contributions are the more practical route — and carry forward can significantly increase how much can be paid in a single year without triggering a tax charge. Corporation Tax relief — and its limits The company may claim Corporation Tax relief on employer pension contributions, but this is not automatic. The contribution must be wholly and exclusively for the purposes of the trade — meaning there needs to be a genuine commercial justification for the amount paid. HMRC will consider whether the total remuneration package, including the pension contribution, is reasonable relative to what the director actually does in the business. It is worth understanding how the typical owner-managed structure fits into this. A director drawing a modest salary as reward for holding office, plus dividends as a return on their shareholding risk, is not necessarily in a weak position. Salary and pension contributions are both elements of remuneration for services; dividends are not. A pension contribution that is proportionate to the director’s role — even where the salary alone is modest — can be commercially justifiable when the package is considered as a whole. Where a contribution appears disproportionate to the director’s role regardless of how the package is constructed — or looks more like profit extraction than reward for services — HMRC may challenge it and the deduction could be disallowed. It is worth noting that a disallowed deduction is a Corporation Tax issue, not a pension one. The contribution still counts towards the director’s annual allowance. The company simply loses the relief it anticipated. The tapered annual allowance — a consideration for higher earners The £60,000 annual allowance is not universal. For higher earners, it tapers down towards a minimum of £10,000 — and the calculation catches more people than might be expected. The taper applies where adjusted income exceeds £260,000. Adjusted income is broadly total income — salary, dividends, and other sources — plus employer pension contributions. It is the inclusion of employer contributions in this calculation that creates the trap: a director with £200,000 of salary and dividends looks comfortably clear of the threshold, but a £60,000 employer pension contribution brings adjusted income to £260,000 — right at the point where tapering begins. Any further contribution pushes further into the taper, reducing the available allowance by £1 for every £2 of adjusted income above the threshold. For directors in this position, carry forward does not solve the problem — it increases the headroom available in principle, but if the tapered allowance has reduced the current year figure significantly, the practical ceiling may be much lower than expected. Getting the adjusted income calculation right before contributions are made is important: an excess over the tapered allowance is charged at the individual’s marginal rate of Income Tax. A straightforward example A director and her company have made some pension contributions over the previous three years, leaving the following unused allowances: Tax Year Unused Allowance 2023/24 £20,000 2024/25 £30,000 2025/26 £10,000 Total carry forward available: £60,000. Combined with the 2026/27 annual allowance of £60,000, the company could potentially contribute up to £120,000 into the director’s pension this year without an annual allowance charge arising — provided the contribution can be commercially justified for Corporation Tax purposes. What happens if the allowance is exceeded? If total contributions exceed the available allowance (current year plus carry forward), the excess is added to the director’s taxable income and charged at their marginal rate of Income Tax. This is known as the Annual Allowance Charge, and it can be significant — so establishing the correct position before making contributions is important. Worth reviewing if contributions have lapsed Carry forward tends to be most valuable where pension funding has been inconsistent — which is common for directors in the early years of a business, or during periods where cash was retained in the company rather than extracted. If that describes your position, it is worth establishing what carry forward you have available before the unused allowances expire. Timing and sizing matter Carry forward makes large one-off contributions possible, but the size and timing of those contributions still need thought. An employer pension contribution reduces company profits, which in turn reduces distributable reserves — the pool from which dividends are paid. A director who maximises a pension contribution in a given year may find the company has less capacity to pay dividends in the same period, affecting take-home income in the short term — or worse, creating an unavoidable director’s loan balance and a withholding tax situation. This is not a reason to avoid larger contributions — but it does mean that the right amount in the right year is a more useful question than simply establishing the maximum available. Spreading contributions across years, or timing them around the company’s profit and cashflow position, will often produce a better overall outcome than using carry forward to its limit in a single year. Individual circumstances affect both the availability of carry forward and the most efficient route for contributions. If you would like to discuss your position, get in touch. This article is intended as a general overview and does not constitute personal financial or pension advice. Sources: HMRC Pensions Tax Manual (PTM044100, PTM044220, PTM044240) and HMRC Business Income Manual (BIM46035).
Pension carry forward — what company directors need to know Most directors are aware that there is an annual allowance on pension contributions — currently £60,000 for 2026/27. What is less well known is that unused allowance from the previous three tax years can be carried forward and added to this year’s limit. For directors who have not been paying regularly into a pension, this can open up a significant funding opportunity. How carry forward works If you have not used your full annual allowance in previous years, the unused balance does not simply disappear. It can be carried forward and used in the current tax year, on top of your current year’s allowance. For contributions made in 2026/27, the carry forward years and their standard allowances are: Tax Year Standard Annual Allowance 2023/24 £60,000 2024/25 £60,000 2025/26 £60,000 Unused allowance expires after three years if not used. The current year’s allowance must be used in full before any carry forward can be applied, and unused years are drawn on oldest first. You must also have been a member of a UK registered pension scheme during any year from which you are carrying forward — though you do not need to have made contributions in that year. Why employer contributions matter for directors This is where the position for company directors differs from employed individuals. Personal pension contributions that attract tax relief are generally limited to the lower of the available annual allowance and relevant UK earnings. Dividends do not count as relevant earnings. A director taking a modest salary and drawing the remainder as dividends may find that personal contributions are limited by their salary alone — regardless of the carry forward available. Employer contributions work differently. Where the company pays directly into the director’s pension: The contribution is not restricted by the director’s salary level. The company may be able to claim Corporation Tax relief, subject to the wholly and exclusively test (see below). The contribution still counts against the director’s annual allowance and carry forward position. For many owner-managed businesses, employer contributions are the more practical route — and carry forward can significantly increase how much can be paid in a single year without triggering a tax charge. Corporation Tax relief — and its limits The company may claim Corporation Tax relief on employer pension contributions, but this is not automatic. The contribution must be wholly and exclusively for the purposes of the trade — meaning there needs to be a genuine commercial justification for the amount paid. HMRC will consider whether the total remuneration package, including the pension contribution, is reasonable relative to what the director actually does in the business. It is worth understanding how the typical owner-managed structure fits into this. A director drawing a modest salary as reward for holding office, plus dividends as a return on their shareholding risk, is not necessarily in a weak position. Salary and pension contributions are both elements of remuneration for services; dividends are not. A pension contribution that is proportionate to the director’s role — even where the salary alone is modest — can be commercially justifiable when the package is considered as a whole. Where a contribution appears disproportionate to the director’s role regardless of how the package is constructed — or looks more like profit extraction than reward for services — HMRC may challenge it and the deduction could be disallowed. It is worth noting that a disallowed deduction is a Corporation Tax issue, not a pension one. The contribution still counts towards the director’s annual allowance. The company simply loses the relief it anticipated. The tapered annual allowance — a consideration for higher earners The £60,000 annual allowance is not universal. For higher earners, it tapers down towards a minimum of £10,000 — and the calculation catches more people than might be expected. The taper applies where adjusted income exceeds £260,000. Adjusted income is broadly total income — salary, dividends, and other sources — plus employer pension contributions. It is the inclusion of employer contributions in this calculation that creates the trap: a director with £200,000 of salary and dividends looks comfortably clear of the threshold, but a £60,000 employer pension contribution brings adjusted income to £260,000 — right at the point where tapering begins. Any further contribution pushes further into the taper, reducing the available allowance by £1 for every £2 of adjusted income above the threshold. For directors in this position, carry forward does not solve the problem — it increases the headroom available in principle, but if the tapered allowance has reduced the current year figure significantly, the practical ceiling may be much lower than expected. Getting the adjusted income calculation right before contributions are made is important: an excess over the tapered allowance is charged at the individual’s marginal rate of Income Tax. A straightforward example A director and her company have made some pension contributions over the previous three years, leaving the following unused allowances: Tax Year Unused Allowance 2023/24 £20,000 2024/25 £30,000 2025/26 £10,000 Total carry forward available: £60,000. Combined with the 2026/27 annual allowance of £60,000, the company could potentially contribute up to £120,000 into the director’s pension this year without an annual allowance charge arising — provided the contribution can be commercially justified for Corporation Tax purposes. What happens if the allowance is exceeded? If total contributions exceed the available allowance (current year plus carry forward), the excess is added to the director’s taxable income and charged at their marginal rate of Income Tax. This is known as the Annual Allowance Charge, and it can be significant — so establishing the correct position before making contributions is important. Worth reviewing if contributions have lapsed Carry forward tends to be most valuable where pension funding has been inconsistent — which is common for directors in the early years of a business, or during periods where cash was retained in the company rather than extracted. If that describes your position, it is worth establishing what carry forward you have available before the unused allowances expire. Timing and sizing matter Carry forward makes large one-off contributions possible, but the size and timing of those contributions still need thought. An employer pension contribution reduces company profits, which in turn reduces distributable reserves — the pool from which dividends are paid. A director who maximises a pension contribution in a given year may find the company has less capacity to pay dividends in the same period, affecting take-home income in the short term — or worse, creating an unavoidable director’s loan balance and a withholding tax situation. This is not a reason to avoid larger contributions — but it does mean that the right amount in the right year is a more useful question than simply establishing the maximum available. Spreading contributions across years, or timing them around the company’s profit and cashflow position, will often produce a better overall outcome than using carry forward to its limit in a single year. Individual circumstances affect both the availability of carry forward and the most efficient route for contributions. If you would like to discuss your position, get in touch. This article is intended as a general overview and does not constitute personal financial or pension advice. Sources: HMRC Pensions Tax Manual (PTM044100, PTM044220, PTM044240) and HMRC Business Income Manual (BIM46035).