Personal pension for non tax payer and self assessment

rufusfrog

This is complicated. I am 54 and I haven't been in employment since 2013. I do receive some book royalties annually which I declare on my self assessment form as other taxable income and used to pay tax on when I was working.

Last year I realised I was missing a trick by not investing in a personal pension - I could put 100% of my earnings in and get tax relief at 20%. I earned roughly £5000, so put it in a pension fund and magically it turned into £6250.

I now think I made a mistake and should have only put £4000 in so the tax relief would bring it up to £5000. I am now looking at my tax return with a worried frown.

But could the excess be considered as carry forward from an earlier year as I have made no other pension contributions since 2013? The personal pension was taken out years ago as SERPS replacement but appears to still be 'active' according to the rules as I was able to simply add more money to it.

If so, should I just enter £4000 on my tax return as last year's contribution? Do I need to let HMRC know I have also made a carry forward contribution and how do I do this?

Dox

Relax! A personal pension gives tax relief at source, which means the provider claims tax at the basic rate and adds it to your pot. This applies whether or not you actually paid tax. You can contribute up to 100% of your earnings (at least at your level of income you can).

dunstonh

I earned roughly £5000, so put it in a pension fund and magically it turned into £6250.

That is not correct.

You can pay £5000 into a pension but due to tax relief, you would write the cheque for £4000. Tax relief reduces the gross contribution you pay. it does not increase the total contribution. Pensions should always be calculated from the gross contribution.

unfortunately, a number of sites on the internet seem to treat tax relief as a bonus rather than tax relief. This gives the false impression which can lead to mistakes such as yours.

If so, should I just enter £4000 on my tax return as last year's contribution? Do I need to let HMRC know I have also made a carry forward contribution and how do I do this?

No. that would be tax fraud and its an easy one for HMRC to spot when the electronic data highlights your earnings at one figure and the pension contribution at a higher figure (both being recorded and cross-referenced under your NI number.

You have to put what you paid into the pension. That is £6250.

you do not have the earnings to use carry forward. So, that option is not available to you.

What will happen is that the tax relief on £1250 of your contribution will not be allowable and your tax bill will increase by £250 because of that.

Its nothing to worry about. You can pay into a pension more than you earn. You just dont get tax relief on the excess over what you earn.

xylophone

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100

Unless it is a retirement annuity contract, tax relief on contributions to personal pensions is obtained by using the relief at source method, meaning contributions will be paid after deducting a relevant rate of tax equivalent of 20% (the individual gets to keep the deduction). This allows the relevant rate of tax to be claimed from HMRC by the scheme administrator and added to the pension fund.

If the member is a higher rate taxpayer there are arrangements by which the balance of tax relief due can be received (see PTM044200).


https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/carry-forward


You can't receive tax relief on contributions in excess of your earnings in a tax year and you only receive higher rate tax relief to the extent that you have paid it.

Have you obtained a new state pension statement?

https://www.gov.uk/check-state-pension

rufusfrog

dunstonh wrote: »

That is not correct.

you do not have the earnings to use carry forward. So, that option is not available to you.

To clarify: I received book royalties in the previous three tax years, of a similar amount, declared on my tax forms, but I made no contributions to any pension schemes in those years. Can I not carry forward?

Edit: oh I get it now. "The maximum you can pay personally is limited to 100% of your current tax year earnings, even if you have unused allowances." So it's only for rich !!!!!!!s earning more than £40,000. Typical!

AnotherJoe

Unfortunately you cant. Carry forward only works if you are (a) putting in more than £40k and (b) earned more than £40k. It is tough really, in that someone earning a lot can claim a lot of relief whilst someone a little cant go back and snag a few quid from previous years, but them's the rules.