Ask ii: can I pay a £115,000 inheritance into my pension this tax year?

A reader asks: “I’ve recently inherited £115,000 from a deceased relative’s estate and want to put it towards my future. I’m 56 years old, earn £85,000 a year and own my home mortgage-free, but my retirement savings are not where I’d like them to be. I’m wondering whether I can direct the full £100,000 into my pension in the current tax year. I understand there’s a ceiling on how much I pay into pensions every year but am unsure how things work. My employer and I contribute £10,000 a year to my pension.”

Craig Rickman, personal finance editor (pictured above), responds: Thank you for your question – you’re not alone in finding pension rules tricky to get your head around. Pensions offer some seriously attractive tax advantages but grasping how to make the most of them isn’t always easy.

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As you rightly note, there’s a limit on what you can contribute into pensions every year and get upfront tax relief. Named the annual allowance, for the 2025-26 tax year (and future ones until further notice) this is the lower of £60,000 or 100% of earnings.

As your earnings for the current tax year are £85,000, your personal annual allowance is £60,000.

You can contribute above the allowance, but you may face a tax charge on any excess, which effectively negates the advantages of funnelling that portion of your savings into a pension. Upfront tax relief is arguably pensions’ most attractive feature and is particularly effective when the relief you get on the way in is higher than the tax rate you pay on the way out.

A couple of scenarios exist where HMRC won’t charge you for going over your annual pension allowance. First, if you retired and took all your pension pots because of serious ill health. And second, if you died.

The annual allowance includes personal contributions, any tax relief added, and payments from third parties, like your workplace. As you and your employer pay a combined £10,000 (including tax relief) a year into your pension, under the annual allowance rules you can contribute a further £50,000, provided you have sufficient earnings.

There are, however, another set of rules that allow you to exceed the annual allowance and receive that much-treasured upfront tax relief. These are called “carry forward” and bring into play unused annual pension allowances from the previous three tax years.

Importantly, you can only carry forward from tax years where you were a member of a UK registered pension scheme, although you’re not required to have made contributions during that period.

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Another thing to be mindful of is that if you’ve already taken a flexible and taxable withdrawal from your pensions and thus triggered the money purchase annual allowance (MPAA) - which restricts annual tax-relievable payments to £10,000 - carry forward is off limits.

Let’s examine how carry forward might work in practice, based on the information you’ve provided.

For the purposes of the following example, I’ve assumed your earnings didn’t surpass £200,000 in any of the previous three tax years, which can bring the tapered annual allowance into play. The taper, as it’s known, potentially reduces pension contributions to £10,000 every year for high earners.

So, let’s look at an example of how carry forward might work in your situation, making assumptions about contributions in previous tax years. To be clear, this is for illustrative purposes only and does not in any way constitute personal advice.

There are a couple of key things to unpick in this table. The first is that you must determine the annual allowance for the tax year in question. The previous Conservative government jacked up the annual allowance from £40,000 to £60,000 in 2023-24, hence the increase from the previous tax year. Second, contributions during each tax year are deducted, leaving unused allowances, which in this example totals £175,000. This is the maximum you could pay into a pension in 2025-26 and get tax relief.

The sticking point here is that the 100% of earnings rule still applies. As you will earn £85,000 in the current tax year and gross pension contributions (including upfront tax relief) total £10,000, there’s scope to pay in a further £75,000 under carry forward.

The way this works is that you use up the current tax year’s allowance first, then move from earliest to most recent. In this example, the remaining £50,000 from 2025-26 would be swallowed up, as well as £25,000 from the 2022-23 tax year.

Contributions to a private pension plan, such as a self-invested personal pension (SIPP), are boosted by basic-rate tax (20%) immediately, meaning £60,000 (£75,000 x 0.8) of your £115,000 inheritance would be used up. The remaining £55,000 could be invested into your pension once the new tax year begins on 6 April 2026, when your annual allowance resets.

The table below shows how the picture would change from 6 April when the 2026-27 tax year starts, assuming you commit what’s left of your inheritance, and you and your employer continue to pay £10,000 into your pension.

The £55,000 contribution is grossed up to £68,750 with basic-rate tax relief, with the total annual payment increasing to £78,750 after accounting for your workplace contributions. This means you would fully use up 2026-27’s £60,000 annual allowance and carry forward £18,750 from 2023-24.

Claiming back higher-rate tax relief

Upfront pension tax relief is available at what’s called your marginal rate - in other words, the rate you pay on the next pound you earn.

As you are a 40% taxpayer, you would be able to claim back an additional 20% tax relief via self-assessment on some of your pension contributions in the 2025-26 and 2026-27 tax years, but not on the full amount. Simply put, you only get higher-rate relief on the income you pay 40% tax on.

Your salary is £85,000 and the higher-rate threshold kicks in once income hits £50,270, so the figure available for 40% relief is £34,730. We must, however, note your workplace contributions receive will have received full tax relief straight away if they were paid via a net pay arrangement or salary sacrifice.

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Depending on your personal circumstances and retirement goals, there may be a strong argument for staggering pension payments over several tax years to enjoy 40% relief on the entire windfall. It’s also worth checking with your employer to see if they’ll match any increases to your personal pension contributions.

To conclude, and as the example illustrates, using pension carry forward is a complex area, but using it correctly can have a sizeable impact on your retirement fortunes. Due to the knotty framework, it’s wise to seek regulated financial advice to gain the reassurance that what you’re doing is suitable and remains within the guardrails.