3 “carry forward” tax breaks to know about, and how you can use them to reduce your bill

In a recent article, we wrote about how the government has reduced the Capital Gains Tax (CGT) Annual Exempt Amount by around 75% in the last two years.

In fact, there are several tax allowances and thresholds that the government has frozen or reduced in the 2024/25 tax year. As a result, your overall tax burden could increase.

One often-overlooked way to reduce tax, however, is to carry forward unused allowances from previous years.

However, since carrying forward is not always possible, it’s important to know which allowances and exemptions you can bring forward from previous years, and which you can’t. Having this knowledge could mean you savvily decrease your tax burden (or increase the amount you can save tax-efficiently each year).

Here are three tax breaks you can carry forward from previous tax years, plus a handy list of “use it or lose it” allowances to know about.

1. The pension Annual Allowance

Perhaps the most generous tax break available to earners in the UK today is the pension Annual Allowance, which is the amount you can pay into a pension each year without an additional tax charge.

As of the 2024/25 tax year, the Annual Allowance stands at £60,000 for most earners. If you are a very high earner or you have already flexibly accessed your pension, your Annual Allowance may be tapered down.

Investing within your pension comes with several upsides when it comes to tax – although it’s important to remember that you can’t usually access your funds until age 55 (rising to 57 in 2028).

Some advantages include:

• Income Tax efficiency. Contributions within the Annual Allowance reduce your adjusted net income, meaning your Income Tax bill falls.
• Government tax relief. As we’ll explore in the next section, most pension contributions receive government tax relief.
• Inheritance Tax (IHT) mitigation. Your pension does not usually form part of your estate for IHT purposes, so you could leave behind a substantial amount tax-free when you pass away.

Many people do not know that you can carry forward any unused Annual Allowance from the last three tax years.

This means that you could potentially pay up to £240,000 into your pension in one year (including employer contributions and tax relief), if you had not made any contributions in the three preceding tax years, and if your Annual Allowance stands at £60,000.

2. Tax relief on pension contributions

Within the Annual Allowance carry forward rule, it’s easy to forget that tax relief counts too.

As of the 2024/25 tax year, tax relief is applied as follows to contributions within that person’s Annual Allowance:

• All contributions receive basic-rate (20%) tax relief at source (meaning this is automatically applied)
• Higher-rate (40%) and additional-rate (45%) taxpayers can claim tax relief at their marginal rate through self-assessment.

Remember: tax relief counts towards your Annual Allowance.

For instance, a higher-rate taxpayer contributing £1,000 into their pension may actually see a £1,400 boost to their pot, because they’d usually receive 20% tax relief at source, followed by an additional 20% relief through self-assessment.

As such, making the most of your Annual Allowance for the current tax year plus any unused Annual Allowance for the three previous years might not cost as much as you thought. Tax relief can do some of the work for you.

If you need guidance on claiming the maximum amount of tax relief on pension contributions, or any other pension matter, contact us today.

3. Your annual exemption for financial gifts

As you may have read about in a previous article, you can give up to £3,000 a year tax-efficiently, split across as many recipients as you like.

Yet many people do not know that you can carry forward any unused annual exemption from one previous tax year.

So, individually, if you haven’t used the previous year’s gift exemption, you could give away up to £6,000 tax-efficiently in one year. When combined with your spouse or partner’s gifts, this could rise to £12,000.

4 “Use it or lose it” tax breaks that reset every financial year

Sadly, not all tax breaks can be carried forward from previous years. Here are four use-it-or-lose-it allowances and thresholds to be aware of:

1. The CGT Annual Exempt Amount
2. The Dividend Allowance
3. The Income Tax Personal Allowance
4. The Individual Savings Account (ISA) annual subscription limit.

So, it may be very useful to conduct an annual review of your tax burden with the help of a financial planner.

Doing so may help you to measure up which tax breaks you can tap into from previous years, and which have reset (or even been reduced) at the start of the tax year.

Work with us to form a tax mitigation strategy

It can be difficult to keep up with changes to tax allowances and exemptions, meaning some individuals may be caught with a higher-than-usual tax bill this year.

We can help you form a wealth strategy with your goals in mind, taking any governmental rule changes into account and ensuring you adapt where possible.

To speak to a financial planner, email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

Workplace pensions are regulated by The Pension Regulator.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.

< back to News & Views