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Mia became a member of her employer’s defined benefit (DB) scheme when she joined the company several years ago. At the end of 2021/22 tax year, they stopped ongoing accrual in the scheme and switched everyone into a DC scheme - a group personal pension. The company pays in 10% of earnings and employees pay 5%. Mia’s earnings for the 2024/25 tax year will be £78,000.

She recently inherited £100,000 and is interested in paying some or all of it into her pension.

So how much of it can she can she pay in?

* Details on the tapered annual allowance and the MPAA can be found in our 'Annual Allowance' guide.

Scope for the current tax year

As neither the tapered annual allowance or MPAA affect Mia, she has the standard £60,000 annual allowance available. 

The total expected contributions this year will be £11,700, so the remaining annual allowance for 2024/25 is £48,300 (£60,000 - £11,700).

Mia could pay a single contribution of £48,300 gross (£38,640 net) to use the full £60,000 allowance for the current tax year.

Tax relief on Mia’s own contributions is limited to her relevant UK earnings in the tax year. If she pays the additional £48,300, she would have personally paid £52,200 (the £3,900 regular contribution and a single of £48,300) from her relevant earnings of £78,000.

If Mia paid more than £52,200, she would still be able to claim tax relief up her total earnings of £78,000 but, if no unused allowance is available through carry forward to boost this year’s annual allowance, she would be subject to the annual allowance tax charge on the amount over the £60,000 allowance, which would effectively take away some of the tax relief claimed.

So Mia needs to check if she has any unused annual allowances from the previous three years which she can carry forward to justify a larger contribution in this year.

Carrying forward unused annual allowance from previous three years

* More detail on working out input amount for DB schemes can be found in our ‘Annual allowance’ guide.

Calculating the unused allowances available for carry forward

Pulling together all of the information, the unused allowances for the three previous tax year are:

There is a total of £101,680 in unused allowances (i.e. £22,800 + £29,800 + £49,080).

So, in addition to the £48,300 payment to fill up this year’s annual allowance, Mia could pay a further £101,680 without exceeding her available allowances.

However, the maximum tax relievable personal contribution is equal to 100% of Mia’s earnings - and £52,200 of this will already be used up in respect of 2024/25.

To maximum fund this year personally, Mia’s total contributions could be: 

• £3,900 - this is her 5% regular contributions to the DC scheme
• A further £48,300 - to use up the 2024/25 annual allowance (taking account of the £7,800 employer contributions)
• An additional £25,800 to fund up to Mia’s 100% of earnings, using carry forward
• Mia’s total personal contributions in 2024/25 would therefore be £78,000

So, in tax year 2024/25 she can make a gross single contribution of £74,100 (£48,300 + £25,800) from her inheritance.

However, she would only actually pay a net contribution of £59,280, to which the provider would add the basic rate relief, grossing it up to £74,100. She could claim some higher rate relief on this payment (but only to the extent that she paid higher rate tax).

When carrying forward, the earliest tax year is used first. This means that all of the unused allowance in 2021/22 (£22,800) is used and then £3,000 from the 2022/23 tax year.

The current year and the three previous years would now look like this after the carry forward exercise:

All of the unused allowance from 2021/22 has been used, but there’s still £26,800 remaining in 2021/22 and £49,080 from 2023/24 which was untouched. These will be available next year if Mia is in a position to make another large contribution that requires carry forward.

Using the remainder of the inheritance

Mia wasn’t in a position pay all of the inheritance into her pension in tax year 2024/25, because she didn’t have the earnings to support the full payment.

Having made a net payment of £59,280 in 2024/25 to achieve the gross contribution of £74,100, she still has £40,720 of the inheritance left. If this is paid into her pension and grossed up, it would result in a gross contribution of £50,900. 

If Mia’s earnings in 2025/26 remain the same or see a typical increase, she would have more than sufficient relevant UK earnings to support both the £50,900 contribution and her regular 5% contributions. 

She still has £75,880 of unused allowance available from 2022/23 and 2023/24, in addition to any remaining 2025/26 annual allowance after regular contributions are taken into account. So she would also have enough available annual allowance to cover both the regular contributions and the remainder of her inheritance.