The 35-year-old former England goalkeeper had spent the last two seasons on loan at the Etihad Stadium from Championship side Derby County.
Carson has pretty much been third choice behind Ederson Moraes and Zack Steffen in his time with the Premier League champions, making just one top flight appearance in the last two seasons.
His contribution behind the scenes however remain valuable and he has been rewarded with another 12 months with Pep Guardiola's side after his contract at Pride Park came to an end.
"It's a pleasure and a privilege to be part of the setup here at City," Carson told Man City's official website.
"To be around Pep [Guardiola] and his backroom staff is fantastic and I feel I have learnt so much since I joined in 2019.
"The lads made me feel at home straight away and I have loved every second of my two years here.
"To commit for another year was such an easy decision. I want to continue pushing the other goalkeepers we have here and I want to make sure my experience rubs off on them."
Director of football Txiki Begiristain added: "Scott brings a wealth of knowledge to the squad.
"He is a former international goalkeeper who has played in lots of big games during a long career.
"We know he is always ready to play, if we need to call upon him.
"The lads love him, and I know his experience has been a huge help to Ederson and Zack Steffen."
