Understanding the Power of Pension Carry Forward
If you’re a company director or business owner sitting on strong profits this year, there’s a simple — and completely legitimate — way to reduce your Corporation Tax bill while building your future wealth: pension carry forward.
It’s one of the most underused tools in financial planning, yet it can deliver significant tax savings if you use it before your business year-end.
This article explains what carry forward is, how it works, and how one business owner used it to save £47,500 in Corporation Tax in a single year.
Carry forward is a technical area of pension planning, and the rules can be complex. Professional financial advice is always recommended before making large contributions.
What Is Pension Carry Forward?
Carry forward is a rule that allows you to use unused pension allowances from the previous three tax years, provided you were a member of a UK-registered pension scheme during those years.
Each tax year, you have an annual allowance — the maximum amount you can contribute to your pension and still receive tax relief.
If you don’t use the full allowance, the unused portion can be carried forward for up to three years.
For business owners and company directors, this means you can make a much larger pension contribution in a profitable year — and claim full Corporation Tax relief on it through your company.
The Annual Allowance Over Recent Tax Years -and a Real Working Example
| Tax Year | Annual Allowance | Contribution Made | Unused Allowance |
|---|---|---|---|
| 2025/26 (Current) | £60,000 | £0 | £60,000 |
| 2024/25 | £60,000 | £10,000 | £50,000 |
| 2023/24 | £60,000 | £10,000 | £50,000 |
| 2022/23 | £40,000 | £10,000 | £30,000 |
Total Allowance Available
- Unused allowances from the previous three years: £130,000
- Current year’s allowance: £60,000
- Total contribution available: £190,000
In this scenario, a business owner could contribute up to £190,000 into their pension in the 2025/26 tax year, assuming they have sufficient profits and meet the qualifying conditions.
The Example – How John Saved £47,500 in Tax
John runs a successful limited company.
Over the past three tax years, he has contributed £10,000 per year into his pension. This year, his business has performed particularly well, and he wants to use his excess profits to build long-term wealth efficiently.
By using carry forward, John can make a £190,000 employer pension contribution through his company, using his unused allowances from previous years plus his current year’s entitlement.
Because employer contributions are treated as an allowable business expense, they reduce the company’s taxable profit.
At a Corporation Tax rate of 25%, the calculation is straightforward:
£190,000 × 25% = £47,500
That means John’s company saves £47,500 in Corporation Tax — money that would otherwise have gone to HMRC, now invested for his future instead.
Key Rules to Remember
- You must have been a member of a UK-registered pension scheme during each of the tax years you wish to carry forward from.
- You must use the oldest year’s allowance first.
- The current year’s allowance must be used before earlier years can be carried forward.
- For personal contributions, you cannot contribute more than your relevant UK earnings for that tax year. However, employer contributions are not limited by earnings — they must simply be “wholly and exclusively” for business purposes.
- You can only carry forward allowances from the three previous tax years.
Why Carry Forward Matters for Business Owners
For limited company directors, carry forward can be one of the most effective strategies to:
- Reduce Corporation Tax
- Extract profits in a tax-efficient way
- Build substantial long-term wealth within a pension
It’s particularly useful if:
- Your profits vary from year to year
- You didn’t maximise your pension contributions in the past
- You’re approaching retirement and want to make larger, tax-efficient contributions
Professional Guidance Is Essential
While the concept of carry forward is simple, applying the rules correctly — and ensuring contributions qualify for full tax relief — can be complex.
Factors such as previous membership of a pension scheme, tapered annual allowance, or other sources of income can all affect the available allowance and potential tax relief.
For this reason, business owners should always seek advice from a qualified financial planner or accountant before making large pension contributions. A professional adviser can help calculate your available allowances accurately and ensure contributions are made in the most tax-efficient way.
The Bottom Line
Carry forward can transform how business owners manage profits — turning potential tax liabilities into personal wealth.
Before your company’s financial year-end, it’s worth reviewing how much unused pension allowance you have. The window to use it is limited, and once a year’s allowance expires, it’s gone for good.
I’m Lee, The Pensions Guy — helping business owners make smarter money decisions and build a better financial future.
If you’d like help calculating your carry forward allowance or understanding how much you could save in Corporation Tax, get in touch for professional guidance.