Using up Pension Plan carry forward when self-employed

Enigmaman

I would like to use carry forward to maximise my contributions to my Personal Pension Plan for the past three tax years.

However, I have run into an obstacle. My provider tells me that I need to use up all my allowance for this tax year before I can use carry forward.

My self-employed profits are much lower than the 32K annual allowance and I will not know exactly what my earnings are until the final day of the tax year (at which point, of course, we enter a new tax year and start all over again).

I am wondering if there is workaround here and what other self- employed people do when they want to use carry forward.

My initial thought is to wait until a few days before the end of the tax year, calculate my profits then and throw in a lump sum payment to use up carry forward.

Or can I estimate my whole year's earnings at an earlier stage, pay in that amount to my pension, and then start using carry forward?

dunstonh

However, I have run into an obstacle. My provider tells me that I need to use up all my allowance for this tax year before I can use carry forward.

That is correct. You must use up the full £40,000 this tax year before you are allowed to use carry forward. This can be part of a single contribution. it doesnt need two steps. However, you cant say do £30,000 and have it allocated to previous years.

My self-employed profits are much lower than the 32K annual allowance

The annual allowance is £40,000.

And as you earn less than £40,000 you cannot use carry forward.

I am wondering if there is workaround here and what other self- employed people do when they want to use carry forward.

There are no workarounds.

Or can I estimate my whole year's earnings at an earlier stage, pay in that amount to my pension, and then start using carry forward?

You can do that but you would suffer a tax bill from HMRC reclaiming the tax relief you were not entitled to have. So, totally negates the reason for doing it.

Enigmaman

Thanks. Not what I wanted to hear but answers the question.

dunstonh

This is one area where being a limited company can be more beneficial than being self employed. Have you considered talking through the benefits of being a limited company instead of self employed with your accountant?

Enigmaman

Not yet, but it sounds worth looking into.

zagfles

Your problem isn't the annual allowance, it's the tax relief limit on personal contributions.

You could put in £40k this year plus any carry over you have available from the previous 3 tax years without breaching the annual allowance.

But the problem is there's another completely separate limit, the tax relief limit of 100% of earnings or £3600 if greater. You can't get tax relief on personal contribution of more than this. You can put money in without tax relief but contributing to a pension without getting tax relief generally isn't a good idea as it'll be mostly taxable on the way out.

Can't see how a limited company would help, you'd save corp tax on the contributions but corp tax can't go negative if you contribute more than your profits!

If you're not sure what your SE profits will be, you can overpay the pension and then claim a refund of the excess you paid over the amount that was eligible for tax relief, eg say SE profit estimate about £32k, you could put £35k in and then when your accounts are sorted and your profits were say £33k, you can claim a £2k refund. Assuming your pension provider allows it - they should do.

dunstonh

Can't see how a limited company would help, you'd save corp tax on the contributions but corp tax can't go negative if you contribute more than your profits!

The annual allowance it not limited by salary. Plus, it is possible to carry losses over into another year (either forwards or backwards). This is something that is usually discussed with an accountant to find the optimal contribution level.

zagfles

dunstonh wrote: »

The annual allowance it not limited by salary. Plus, it is possible to carry losses over into another year (either forwards or backwards). This is something that is usually discussed with an accountant to find the optimal contribution level.

Backwards to before he set up the ltd company? Or do you mean make a large contribution as soon as he sets up the ltd company and post a big first year loss and then roll that loss forwards to future years? So he wouldn't get tax relief when he contributes, but in future years when he can offset profits against the first year loss?

All sounds overcomplex - why not just contribute in future years since he'll have to wait till them for the tax relief anyway. But there might be other good reasons to go ltd.

dunstonh

Backwards to before he set up the ltd company?

I just included backwards as generic information.

Or do you mean make a large contribution as soon as he sets up the ltd company and post a big first year loss and then roll that loss forwards to future years? So he wouldn't get tax relief when he contributes, but in future years when he can offset profits against the first year loss?

Company losses can be carried into future years reducing the tax bill in future years.

All sounds overcomplex - why not just contribute in future years since he'll have to wait till them for the tax relief anyway. But there might be other good reasons to go ltd.

Its not complex.