Pension carry forward

economic

Hi

I am a bit confused about the pension carry forward rules. I will explain what i want to do so i was wondering if you can tell me if its possible:

- This tax year (17/18) income will be around 5k say.
- Previous tax year (16/17) income was 50k say.
- I don't have an existing pension i contribute to and haven't contributed anything this tax year and last tax year i contributed (as did my employer at the time) for a month or two to the company pension.
- I have a pension account from my previous employer (i can log into to see the value, its all fully invested) but not sure if i can contribute since i don't work for them (i'm unemployed now).

My question is can i open up a SIPP say and contribute last year's x amount so i can get back some 40% and maybe 20% tax i paid? I heard i have to make use of this years allowance first, does this mean i have to contribute the 5k? Or is it 40k (as per above i did not earn that much this year, only 5k)?

Very confused about the rules so if anyone can help that would be great.

Thanks

Linton

You cannot carry forward Earned Income. Note that only income from employment counts, not pensions , interest, rents etc. You can carry forward the £40 limit, but that doesnt seem to be of much use to you. So tthis tax year you are limited to £5K, as long as it is Earned.

If you do want to contribute something you can set up a private pension - either a Personal Pension with an insurance company or a SIPP with a platform. You contribute 80% of your desired grposs contribute and the est is paid in by HMRC.

economic

Linton wrote: »

You cannot carry forward Earned Income. Note that only income from employment counts, not pensions , interest, rents etc. You can carry forward the £40 limit, but that doesnt seem to be of much use to you. So tthis tax year you are limited to £5K, as long as it is Earned.

If you do want to contribute something you can set up a private pension - either a Personal Pension with an insurance company or a SIPP with a platform. You contribute 80% of your desired grposs contribute and the est is paid in by HMRC.

No the 5k is not income from employment. So if i had no employment income this tax year, can i still contribute last years earnings (which was employment income)? If so how much?

xylophone

If you have no relevant earnings you can contribute £2880 to a personal pension/SIPP/stakeholder and the provider will claim tax relief of £720.

economic

xylophone wrote: »

If you have no relevant earnings you can contribute £2880 to a personal pension/SIPP/stakeholder and the provider will claim tax relief of £720.

Can i do that every year? And can i then add more from previous years allowance of 40k?

Linton

economic wrote: »

Can i do that every year? And can i then add more from previous years allowance of 40k?

You can always make a net £2880/gross £3500 contribution. If you contribute more than that it must all be covered by both the earned income and the £40K allowances. So the answer to your first question is Yes and the answer to your second is No.

Alexland

But you can only get basic tax relief on your £2880 / £3600 contribution up to age 75 so you can feed money in slowly.

Forget carry forward as your earnings are not high enough to use it. I might use it for the first time next year as my employer has just set easy bonus targets so I may be contributing more than £40k of (barely) earned income offset by not having used the full allowance in previous years. All to avoid 40% tax and child benefit clawback.

zagfles

economic wrote: »

Can i do that every year? And can i then add more from previous years allowance of 40k?

I'm guessing you've read some simplistic drivel like "the most you can contribute to a pension is earrned income subject to a min of £3600 and max of £40k". Then you've read about carry-forwards and wonder why you can't carry forwards.

This sort of oversimplified rubbish causes all the confusion. The fact is there are two completely separate limits with completely separate rules, and they need to be considered separately.

1) You have an annual allowance of £40k. This includes employer contributions. Unused allowance can be carried forwards from the last 3 tax years, if you were in a pension scheme in those years. For years prior to 2015/16 it was measured over "pension input periods" which didn't always align with the tax year.

2) You have a tax relief limit of 100% of relevant earnings (generally employment income & similar) or £3600 if greater. This doesn't include employer contributions. This can't be carried forwards. It always applies over the tax year.

So you can see you have no issue with the annual allowance, ie 1) above. You can carry forwards loads from last year and probably previous years. So you have masses of available AA.

But you are still constrained by the earned income tax relief limit, ie 2), where these is no carry-forwards allowed.

Technically, both these limits are "soft", unlike eg the ISA limit which is "hard". You are allowed to exceed them, in the case of the AA you get taxed on the excess, in the case of the earned income limit you need to tell your pension provider that you're not entitled to tax relief. But it's usually a bad idea in terms to tax outcomes to exceed them, as you could end up getting taxed twice on the same money.

economic

zagfles wrote: »

I'm guessing you've read some simplistic drivel like "the most you can contribute to a pension is earrned income subject to a min of £3600 and max of £40k". Then you've read about carry-forwards and wonder why you can't carry forwards.

This sort of oversimplified rubbish causes all the confusion. The fact is there are two completely separate limits with completely separate rules, and they need to be considered separately.

1) You have an annual allowance of £40k. This includes employer contributions. Unused allowance can be carried forwards from the last 3 tax years, if you were in a pension scheme in those years. For years prior to 2015/16 it was measured over "pension input periods" which didn't always align with the tax year.

2) You have a tax relief limit of 100% of relevant earnings (generally employment income & similar) or £3600 if greater. This doesn't include employer contributions. This can't be carried forwards. It always applies over the tax year.

So you can see you have no issue with the annual allowance, ie 1) above. You can carry forwards loads from last year and probably previous years. So you have masses of available AA.

But you are still constrained by the earned income tax relief limit, ie 2), where these is no carry-forwards allowed.

Technically, both these limits are "soft", unlike eg the ISA limit which is "hard". You are allowed to exceed them, in the case of the AA you get taxed on the excess, in the case of the earned income limit you need to tell your pension provider that you're not entitled to tax relief. But it's usually a bad idea in terms to tax outcomes to exceed them, as you could end up getting taxed twice on the same money.

Thanks this is very helpful. Agree all the websites i have seen are really confusing. they should be using what you have posted instead!

So i guess for me all i can contribute is £3600 and nothing more.

redux

What you really want is carry back, the ability to make a payment now and treat it as if paid in the previous tax year.

This was abolished in about 2001. So was carry forward, but they later relented on that.

It's about time the £3600 was increased, I reckon. Same amount since introduction in 2001.

economic

redux wrote: »

What you really want is carry back, the ability to make a payment now and treat it as if paid in the previous tax year.

This was abolished in about 2001. So was carry forward, but they later relented on that.

It's about time the £3600 was increased, I reckon. Same amount since introduction in 2001.

Yeh if instead of 3.6k it was say 10k then i would consider it. It would mean opening a SIPP and paying the charges would make it worth it. At 3.6k i just don't see the point.