The Room You Forgot You Had: Checking Pension Headroom Before the Winter Payroll Run

For many owner-managers, the pension annual allowance is treated as a fixed annual figure: £60,000 for 2026/27, use it or lose it. That is only part of the picture. Carry-forward allows unused allowance from up to three earlier tax years to be used in the current year, provided the conditions are met. In practice, the relief is easy to overstate and easy to forget. Late autumn is a sensible moment to check because decisions about salaries, bonuses, dividends and employer pension contributions for 2026/27 are still open.

The mechanics in plain English

Each tax year has an annual allowance. For 2026/27 the standard figure is £60,000. If contributions in a year are below the allowance, the unused amount may be carried forward for up to three years. For 2026/27, the relevant earlier years are 2023/24, 2024/25 and 2025/26. The individual must have been a member of a registered pension scheme in the year whose allowance is being carried forward. Membership is enough; a contribution is not required in that year, but the records must show membership.

Carry-forward does not create a fund or a tax refund. It increases the amount that can be contributed before an annual allowance charge arises. Tax relief is a separate question, and the two checks should not be conflated.

A simple record might look like this:

On those figures, £125,000 of earlier allowance could be carried forward. Add the 2026/27 allowance and the theoretical contribution capacity is £185,000. That is not a recommendation to contribute £185,000; it is the ceiling before an annual allowance charge on the assumptions used. The assumptions matter, which is why a November review is more useful than a March guess.

Why late autumn is the practical moment

By November, most small firms have a clearer view of profit, cash and the likely bonus pool. The Christmas payroll is being planned, dividend resolutions are being drafted and the company's cash position is more visible than it was in April. Pension contributions can be made by the individual or by the company, and the choice interacts with salary, corporation tax and cashflow. Leaving the decision to March often means provider cut-off dates, rushed valuations and less time to check tapered allowance or the money purchase annual allowance.

There is also a behavioural point. Pension contributions are easier to consider alongside remuneration planning than in isolation. A director who is weighing a larger salary against a dividend, or a sole trader who is setting aside money for tax, can test whether pension headroom changes the shape of the plan. That test is best done before the figures are locked in.

A sole trader's check

Consider a sole trader with net relevant earnings of £180,000 in 2026/27. In each of the three earlier years she contributed £20,000 and had no taper. Her unused allowance is £40,000 a year, or £120,000 in total. Add the current £60,000 and her theoretical annual allowance capacity is £180,000. If she decides to put £100,000 into a personal pension before 5 April 2027, the annual allowance should not produce a charge, provided the records are correct.

But personal tax relief is capped by relevant earnings. At £180,000 of earnings she has room for a £100,000 personal contribution. If her profits were £70,000, a £100,000 personal contribution would not attract relief on the excess; carry-forward does not raise the earnings limit. For a sole trader, the practical check is therefore two-limbed: annual allowance capacity and relevant earnings. A contribution can be within the allowance and still be inefficient from a relief perspective.

A company director's check

Now consider a company director with salary of £40,000 and dividends of £90,000. Dividends generally do not count as relevant UK earnings for personal pension tax relief. A personal contribution of £40,000 could use the salary, but a larger personal contribution would need careful checking. An employer contribution is different. If the company has retained profit and wants to make an employer contribution, it may be able to use the director's carry-forward, but the company must be able to show that the contribution is wholly and exclusively for the purposes of the trade and is affordable.

Suppose the director has £50,000 of unused allowance from earlier years and the current-year allowance is £60,000. That gives £110,000 of annual allowance capacity on the standard assumptions. An employer contribution of £100,000 could be within that capacity. The company may also be able to deduct the contribution for corporation tax purposes if the conditions are met. But the director's earnings limit does not cap an employer contribution in the same way as a personal contribution, so the annual allowance, tapered allowance and money purchase annual allowance still need to be tested. Salary and dividend mix should be reviewed before the contribution is committed.

Traps worth testing before committing

Unused does not mean available

The most common error is to assume that unused allowance from any earlier year is automatically available. The individual must have been a member of a registered pension scheme in the year in question. If the pension was opened in 2025/26, there is no 2023/24 allowance to carry forward. Records of membership matter, not just records of contributions.

Tapering changes the arithmetic

For higher earners, the standard £60,000 may not apply. Broadly, where threshold income exceeds £200,000 and adjusted income exceeds £260,000, the annual allowance is reduced by £1 for every £2 of adjusted income above £260,000, down to a minimum of £10,000. The figures are complex and include pension contributions in the adjusted income test. Each earlier year must be tested on its own facts; a carry-forward calculation based on £60,000 a year can be badly wrong for a high-income director.

Flexibly accessed pensions

If an individual has flexibly accessed a money purchase pension, the money purchase annual allowance may apply. That limit is £10,000 for 2026/27. Carry-forward cannot be used to increase the money purchase annual allowance. A November check should establish whether the cap applies before any contribution is planned.

Allowance is not relief

The annual allowance is a charge-avoidance threshold. Tax relief is a different mechanism. A contribution may be within the annual allowance but attract no relief because it exceeds relevant earnings. Conversely, relief may be available on a contribution that later creates an annual allowance charge if the allowance is exceeded. Both tests need to be run.

Provider deadlines and paperwork

Pension providers have administrative cut-off dates, and March is a busy period. A contribution intended for the 2026/27 tax year must be accepted and processed in time. Keep statements, contribution confirmations and scheme membership records for each earlier year. If the calculation is challenged, the paperwork is the defence.

A practical November checklist

• Gather pension statements for 2023/24, 2024/25 and 2025/26 and confirm scheme membership for each year.
• Record employee, employer and salary sacrifice contributions separately, with dates.
• Estimate whether tapered annual allowance applies in any of the four relevant years.
• Check whether the money purchase annual allowance applies.
• Separate personal contribution capacity from employer contribution capacity.
• Model the cashflow effect for the business and the tax effect for the individual.
• Ask the pension provider for its processing deadline before committing.
• Document the decision, including why a contribution was or was not made.

Barr Financial Services publishes this as general guidance for UK households and small firms. Pension rules are detailed and depend on individual circumstances; a regulated adviser should be consulted before a significant contribution is made.