Pension: how to carry forward unused allowances?

SouthLondonUser

I have not used all my pension allowance this year and the previous two. Btw, I do appreciate the tax year ends tomorrow and no, I don't want to do this between today and tomorrow - I plan to do it in the 2017 - 2018 tax year.

My question is: how exactly do I go about investing the unused allowance?

Do I just invest the money, or do I need to submit some kind of supporting evidence to HMRC to prove my unused allowance? Or do I not need to submit it, but should keep it ready should HMRC ever audit me?

The unused allowance between 2014-15 and 2016-17 is ca. £ 45k.
Does this mean that, in 2017-18, I can invest £85k, ie £40k (usual allowance) + £45k from the previous years?

Should I instead be so lucky that my 2017-18 income will be such that my allowance will be less than £40k, will I still be able to invest whatever the allowance for 2017-18 will be, plus £45k from the previous years?

I would like to invest this money in my SIPP. I am a higher-rate taxpayer. Am I right in understanding that the process would be something like this?

1. I pay £36k into the SIPP
2. The government adds 20%, topping it up to £45k
3. When I file my tax return I get £12,400 of extra tax relief. This will be cash HMRC pays into my bank account, not into my SIPP.
4. I can adjust my tax code to take into account some contributions, but not all. I seem to remember the maximum is around £5k.

I remember reading somewhere that calculating the unused allowance is complex because not all pension providers use the same "contribution year" but I never really understood what it means, nor looked into it.

Thanks!

ex-pat_scot

i was told to retain evidence of unused allowance that you have carried forward, but you do not need to actually notify HMRC if you are above the £40,000 contribution in the tax year.


There used to be complicated "Pension Input Periods" that calculated the max annual contribution for your scheme. These had varying end dates, but these were simplified in the (2015?) June budget statement and all reset to align with tax year.

HappyHarry

1. I pay £36k into the SIPP
2. The government adds 20%, topping it up to £45k
3. When I file my tax return I get £12,400 of extra tax relief. This will be cash HMRC pays into my bank account, not into my SIPP.

If you paid 40% tax on all the £45,000, then when you file your tax return you will get £9,000 back, which would be paid to your bank account.

Explanation:
- You are making a gross pension contribution of £45,000.
- You would expect to get 40% tax relief on that, providing you paid 40% income tax on the entire £45,000.
- 20% of the relief is added to your pension pot directly (£9,000).
The remaining 20% relief is claimed via your tax return (£9,000).

SouthLondonUser

Yep, sorry, if I pay 40% on the whole of the £45k, then the additional tax relief is £9k. Am I right in understanding that the money I have to pay into the SIPP is £36k, and the additional tax relief (the "second" set of £9k) is claimed via the tax return, ie HMRC pays it to my bank account, NOT into the SIPP?

Also, are there some SIPP providers who may refuse to let you pay more than £32k (which become £40k with HMRC's automatic top up) into a SIPP? Or presumably if you call them and explain the situation they should let you do it? My sipp is with Interactive Investor

bowlhead99

Yes, I'd agree with Harry that a £36000 contribution into a pension operating "relief at source" will get £9000 added by the provider for £45000 gross. Then when you tell HMRC that you've made £45000 of gross pension contributions (and HMRC will know you've had to pay £36000 for that), HMRC will give you a further £9000 refund by cheque or bank transfer so that you've only really paid £27000 net.

That's the right position for someone who would otherwise have paid 40% tax on the whole £45k leaving them with £27k net of tax. They effectively have spent that £27k buying £45k of pension assets. Not sure where your extra "£12400 of relief" came from.

As Harry said that works if your effective rate of tax on the whole £45k was 40%. It is quite a large contribution so if the salary had fallen across multiple tax rate bands, the appropriate relief would also be blend of different effective rates, and the total relief percentage needed might be less than or more than 40%.

Am I right in understanding that the money I have to pay into the SIPP is £36k, and the additional tax relief (the "second" set of £9k) is claimed via the tax return, ie HMRC pays it to my bank account, NOT into the SIPP?

YES that is right, they pay you to get your cost down to £27k net cost to you - they don't add it into the pension to give you over £45k in the pension.

Of course, knowing that cash pay out is coming soon after the end of the tax year, nothing to stop you putting more than the [£36k ; £45k gross] into the pension in the first place (assuming you have the allowance to support a bigger gross) and even running a little overdraft, credit card 0% deal, or bank loan to help finance it in the short term while waiting for the refund from HMRC to your bank account.

dunstonh

Pensions are always talked about and considered in gross terms. Not net.

SouthLondonUser

About "pension input periods" (I had forgot the word, so thanks!) I found they were aligned in the 2015-16 tax year: https://www.gov.uk/government/publications/pensions-technical-note-transitional-provisions-for-aligning-pension-input-periods/pensions-technical-note-transitional-provisions-for-aligning-pension-input-periods

Since part of my unused allowance was accrued prior to that, I'm wondering if I should get (and pay for) professional advice to make sure the calculation of the unused allowance is correct. Is this something a tax accountant or a financial advisor could do? Note I don't need any advice on how to invest the money, just a confirmation that I calculated the unused allowance correctly.

zagfles

SouthLondonUser wrote: »

About "pension input periods" (I had forgot the word, so thanks!) I found they were aligned in the 2015-16 tax year: https://www.gov.uk/government/publications/pensions-technical-note-transitional-provisions-for-aligning-pension-input-periods/pensions-technical-note-transitional-provisions-for-aligning-pension-input-periods

Since part of my unused allowance was accrued prior to that, I'm wondering if I should get (and pay for) professional advice to make sure the calculation of the unused allowance is correct. Is this something a tax accountant or a financial advisor could do? Note I don't need any advice on how to invest the money, just a confirmation that I calculated the unused allowance correctly.

The schemes you're in should give you the pension input amounts and pension input periods for the last few years if you ask them.

SouthLondonUser

Thanks.

Also, when I file my self-assessment online, is there a section to specify that I carried over the unused allowance from the previous 3 years? Or do I need to have my tax return filed by an accountant for this? My tax affairs are straightforward (income from one job + a little bit of interest from savings) so I have never used an accountant until now.

EdSwippet

SouthLondonUser wrote: »

Also, when I file my self-assessment online, is there a section to specify that I carried over the unused allowance from the previous 3 years? Or do I need to have my tax return filed by an accountant for this?

No, and no. There's no place on self-assessment to record this, and no need to do so. Just keep your own careful records in case HMRC decide to query something later on.

SouthLondonUser

So, if I contribute more than £40k in a given year (e.g. £45k from unused allowance + £40k for the current year, as per my example), the self-assessment system will still refund me for the whole amount, even the bit above £40k? I mean, if I cannot specify anywhere whether I am carrying over unused allowance or not, the system cannot know whether I am doing that or I am paying more than I could.