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Where Taxpayers and Advisers Meet

Pension allowance carry forward

Jupiter01
Posts:70
Joined:Tue Jul 11, 2023 8:11 pm
Pension allowance carry forward

Postby Jupiter01 » Sun Sep 24, 2023 11:47 am

Can I please have some clarity on this.

Here is my current understanding and I am using fictitious numbers:
- Let's assume my annual salary is £100k gross
- I can make £60k pension contributions this year (YE April 24) and use any unused allowances from the previous 3 years. I am aware that the previous 3 years had an allowance of £40k.
- Lets say the unused allowances are as follows : YE 23 £10K, YE 22 £40K, YE 21 £20K. To calculate these, I have included: employers contributions, employee contribution and automatic tax relief fetched by pension provider

Based on the above:
- I can contribute £60k for this year, YE 24. Again, this includes: employers contributions, employee contribution and automatic tax relief fetched by pension provider
- I can then contribute a further £40k as it's still within the gross salary of £100k. Hence, I use the earliest YE22 first and then a further £20k from YE 22.
- Any additional contributions will be taxed as I am exceeding the total of my annual gross salary. Hence, it would be better to roll these over payments into the next tax year.

Can I please have your comments/validations of the above.

Thanks in advance.

strawn
Posts:96
Joined:Fri Jun 01, 2012 10:11 am

Re: Pension allowance carry forward

Postby strawn » Sun Sep 24, 2023 4:25 pm

Looks OK to me (but I am an amateur) except for the typo in "I use the earliest YE22 first".

Jupiter01
Posts:70
Joined:Tue Jul 11, 2023 8:11 pm

Re: Pension allowance carry forward

Postby Jupiter01 » Sun Sep 24, 2023 6:59 pm

Looks OK to me (but I am an amateur) except for the typo in "I use the earliest YE22 first".
Ah yes. Earliest year should be YE 21.
Would appreciate any further thoughts on this post please. Want to make sure I am approaching this in the right way.

Thanks

Jupiter01
Posts:70
Joined:Tue Jul 11, 2023 8:11 pm

Re: Pension allowance carry forward

Postby Jupiter01 » Mon Sep 25, 2023 1:06 pm

Hi,

Can I please have some more input to this. Want to understand how I should proceed with this and your comments would be highly appreciated. Thanks in advance.

Feds
Posts:59
Joined:Wed Aug 06, 2008 4:10 pm

Re: Pension allowance carry forward

Postby Feds » Tue Sep 26, 2023 7:43 am

Yes, your understanding is generally correct. However, a couple of points:

• If this was your situation, and you expected to earn similar in future years and ignoring the risk of legislation changing in the future, you may decide it wasn’t in your interest to make use of the carry forward allowances at all. By restricting contributions to £49,730 gross each tax year, you’d be benefitting from 40% tax relief on the whole amount. Going over this figure in any year would provide relief at 20% on the excess.

• In the above example, if you paid in more than £100,000, you wouldn’t be taxed on it. You simply wouldn’t be entitled to tax relief on it. It would only be if/when you exceeded your annual allowance (including carry forward) that an annual tax allowance charge would apply.

Jupiter01
Posts:70
Joined:Tue Jul 11, 2023 8:11 pm

Re: Pension allowance carry forward

Postby Jupiter01 » Tue Sep 26, 2023 8:08 am

Thanks @Feds
A few follow-ups please.

- where do you get the £49,730 figure from?
- If I pay more than £60k (including automatic top-up) into my SIPP, I think the Pension Provider continues to apply the automatic tax relief. I assumed that it thinks that payments relate to carry forward and hence processes them in the same way. Is that the case?
- Ordinarily, I would claim a further 25% on my personal contributions through my tax return. Is this capped at the annual allowance (£48000 of my own money?) and can I not claim for carry forward amounts?

Thanks again.

Feds
Posts:59
Joined:Wed Aug 06, 2008 4:10 pm

Re: Pension allowance carry forward

Postby Feds » Tue Sep 26, 2023 5:48 pm

First point
£49,730 are your earnings subject to higher rate tax. Based on a salary of £100,000 (assumes no other earnings), £12,570 is your personal allowance, £37,700 at basic rate and £49,730 at 40%.

You get 20% relief at source. Higher rate relief is given by extending the basic rate tax band by the gross contribution. So a contribution of £49,730 extends the basic rate threshold from £37,700 to £87,430. This provides an additional 20% tax saving on this £49,730, i.e. £9,946.

So, you get £9,946 tax relief at source (a £49,730 gross contribution costs you £39,784).
And an additional tax saving/reduction of £9,946 via your tax return.
Total ‘tax relief’ is £19,892 which is 40% of £49,730.

If you pay in more than £49,730 this tax year, you won’t have sufficient taxable income to fully accommodate the extended basic rate tax threshold and therefore the effective total tax relief figure reduces below 40%.

A £100,000 gross contribution provides total tax relief of £29,946 i.e. 29.94%.
£20,000 is provided through tax relief at source (actual cost to you is £80,000).
Your basic rate band is extended to £137,700, but as your income is £100,000, this only provides additional 20% relief on £49,730 otherwise taxed at 40%, i.e. £9,946.

So it may be better to phase the contribution of £100,000 over 2-3 years so as to optimise the full 40% saving.

Second point
Yes, they would apply tax relief at source on this, but there would be a tax charge aimed at recovering tax relief if contributions were greater than the annual allowance (including carry forward). I believe the tax return asks whether you have exceeded the allowances or not.

Third point
As long as you enter in the right figure (the total gross pension contribution), your tax return will work it out. There is no cap of £48,000 – you enter in the gross amount paid and your basic rate threshold is then extended by that amount as per the above. If you have paid in more than your allowance (which will include carry forward), then there will be a tax charge).

Remember, some individuals have reduced pension allowances, i.e. higher earners subject to the taper and those who are subject to the money purchase annual allowance.

Jupiter01
Posts:70
Joined:Tue Jul 11, 2023 8:11 pm

Re: Pension allowance carry forward

Postby Jupiter01 » Thu Sep 28, 2023 3:08 pm

I really appreciate the detailed examples you have provided. I have now sat down and tried to follow each part of this. Think I am (almost) there!

Is the essence of this, that the additional 20% (via tax return) will only be paid for the income that has been originally taxed at 40%? This would make sense I suppose... This would be £49730 in the case of someone earning £100k. Secondly is this figure of £49730 my money or my money + automatic tax relief?

Secondly, if I paid £55000 of my own money into the pension, the auto relief will be received and this will be the case for any amount which is within my annual allowance plus carry forward limit?

Finally, to take another example to make sure I have understood this, If I paid £55000 of my own money into the pension, this becomes £68750 once the auto relief is applied. But when I claim tax relief via my tax return, I enter the figure of £55000 (my money that went into the pension) and it does all the maths and essentially calculates that I will receive additional relief of £12432.50 (On the £49730 portion and no additional relief on the remaining £5270).

If this is correct, I could have contributed the £5270 in the following year and got 40% on that too. I would be most grateful if you could validate this for me. Thanks for your support.

someone
Posts:714
Joined:Mon Feb 13, 2017 10:09 am

Re: Pension allowance carry forward

Postby someone » Thu Sep 28, 2023 3:29 pm


If this is correct, I could have contributed the £5270 in the following year and got 40% on that too. I would be most grateful if you could validate this for me. Thanks for your support.
Not worked it through in detail but this sounds right, yes. It's better to take advantage of the 40% relief over two consecutive years than only get 20% relief by doing it in one year.

IIUC HICBTC kicks in at 50K - so if that's a concern to you then it might make more sense to get your income below 50K even if some of the pension contribution only attracts 20% relief.

Another thing to think about if you're expecting your income to rise, the band from 100K to 2x personal allowance gets 60% relief. So if you expect your income to be over 100K next year then it's (almost always) better to keep enough money back to make contributions with 60% relief the next year.

And following on from that point, I don't know if you're PAYE (salary) or self employed - but in particular if you're PAYE then you might have to worry about cashflow as you (probably) won't get the (higher rate) tax relief promptly. (In theory HMRC can change your tax code - but I wouldn't want to rely on it)

So assume you want to pay 25K (gross) into your pension because your income is 125K - you'll pay in 20K (which you'll need to take out of your bank account, i.e. you'll need the money up front), the pension fund will reclaim 5K from HMRC (so the gross contribution is 25K) and you'll then get another 10K back from HMRC "eventually".

So up front it will cost you 20K from savings even though once you've got all the tax back from HMRC it only really cost you 10K.

Jupiter01
Posts:70
Joined:Tue Jul 11, 2023 8:11 pm

Re: Pension allowance carry forward

Postby Jupiter01 » Thu Sep 28, 2023 4:30 pm

Thanks. If you get the chance, I would welcome your validation of my numbers and calcs. I have some confusion on where the gross and net contribution amounts apply.

On your latest response:
- what is IIUC HICBTC?
- I am on PAYE and don't follow this part : " Another thing to think about if you're expecting your income to rise, the band from 100K to 2x personal allowance gets 60% relief. So if you expect your income to be over 100K next year then it's (almost always) better to keep enough money back to make contributions with 60% relief the next year." An example on this would be very helpful please.
- on this "So assume you want to pay 25K (gross) into your pension because your income is 125K - you'll pay in 20K (which you'll need to take out of your bank account, i.e. you'll need the money up front), the pension fund will reclaim 5K from HMRC (so the gross contribution is 25K) and you'll then get another 10K back from HMRC "eventually".", wouldn't I get 5k (you stated 10k) from HMRC when doing my tax return?

Thanks again.


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