Annual Pension Contribution Allowance

greenpeter

Hi all. Hoping someone can un-confuse me. I have earned between £14k - £23k a year over the last 4 tax years and employer and personal contributions have totalled 22% of income each year. My understanding was that I can contribute up to 100% of income per year and backdate this for 3 tax years (ie to tax year 2016/17). So I am looking to open a SIPP and use savings to contribute the difference between my earnings and actual pension contributions for this and previous 3 tax years. However I'm now confused as Pensions Advisory service seems to say I can only do this if I earn at least £40k a year - which seems rather unfair.

To use carry forward, you must make the maximum allowable contribution in the current tax year (£40,000 in 2019/20) and can then use unused annual allowances from the three previous tax years, starting with the tax year three years ago. From PAS-carry forward section

Help! Is this right or can I contribute previous tax years on any earnings level up to £40k?
GreenPete

SonOf

My understanding was that I can contribute up to 100% of income per year and backdate this for 3 tax years (ie to tax year 2016/17).

No. Only if you were a company director or earning over £40k could you use carry forward. You must also have an existing pension set up covering those years.

DBdoobydoo

SonOf wrote: »

No. Only if you were a company director or earning over £40k could you use carry forward. You must also have an existing pension set up covering those years.

That's not correct. The annual allowance for everyone is £40K. Helpfully HMRC has an online calculator that allows you to calculate how much allowance you can carry forward from the previous three tax years. https://www.tax.service.gov.uk/pension-annual-allowance-calculator
OP, is it a DB or DC pension you are contributing to? The calculation is different in working out how much of your allowance is used. If it's DC then your contributions if it's DB then roughly it's 16x however much your pension increased by in that year e.g. if you earned £1K of pension then you are deemed to have used £16K & thus have £24K left for that year.

jsinc

You can only contribute as much as your earnings this tax year, whatever carry forward you may technically have. That's why it says you must first make the max allowable contribution in the current tax year (£40k).


"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"

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

NoMore

@dboobydoo, nope your wrong, you can only contribute max 100% of your income or 40k whichever is lower, so as the OP earns at most 23k, the most he can contribute to a pension is 23k.

To use carry forward you must first use all of your 40k allowance so @Sonof is right that you need to be earning more than 40k before you can use carry forward.

Dazed_and_confused

The op actually said this in the first post,

I have earned between £14k - £23k a year over the last 4 tax years

We don't actually know what they expect to earn in the current tax year. Although I suspect it is going to be less than £40k so carry forward is going to be irrelevant.

greenpeter

Thanks all for your time replying - I'm still not entirely clear. I understand having to use this years allowance before using carry forward (though this does seem to put you at risk of being fined for over-contributing), but if you have to earn £40k in a year (which I won't) before you are allowed to use carry forward I would expect all the relevant advice pages (including MSE) to say "You can only use carry forward if your pensionable earnings in the tax year you are paying the contributions are at least £40k". But no-one is that explicit / clear. I believe I can at least use this years anyway so I'll likely find out from the provider I take out a SIPP with - looking at Abundance for socially responsible / green pension.
GreenPete

NoMore

Not sure why you find it confusing. The pension advisory service explain it thus

The actual amount you can pay in a tax year for tax relief purposes is the greater of:

• A gross contribution of £3,600 or:
• 100% of your earnings, subject to the annual allowance.

The current annual allowance for most people is at £40,000.

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/how-much-can-i-pay-into-a-pension

zagfles

The thing that confuses people is that there are two completely separate limits with different rules, but there's a lot of simplistic drivel out there which tries to combine them into one.

Here's an explaination I did earlier:
https://forums.moneysavingexpert.com/discussion/comment/73611334#Comment_73611334

zagfles

NoMore wrote: »

@dboobydoo, nope your wrong, you can only contribute max 100% of your income or 40k whichever is lower,

This is wrong.

The annual allowance can be carried fowards, so many people can contribute more than £40k, subject to the tax relief limit.

Some people earning well under £40k could exceed the annual allowance if they contribute 100% of earnings to a pension. For instance people on £30k with a generous DB scheme, who may have a pension input amount of £10k+ to the DB scheme.

so as the OP earns at most 23k, the most he can contribute to a pension is 23k.

Yes, assuming the £23k is net of any employee contribution to an employer's scheme.

Basically, the annual allowance is totally irrelavant to OP (unless unusual circumstances eg a very generous DB scheme and a big payrise creating a big pension input amount). The only limit that matters is the tax relief/earned income limit of 100% of earnings (gross).

Which can't be carried forwards, doesn't include employer contributions, and doesn't use pension input amounts (only employee & personal contributions)

NoMore

Thanks for quoting me out of context where I go on to say you need to use all of your 40k up before using carry forward.

And yes the make up of that 40k can be affected by a Pension Input Amount from a DB pension that people don't realise how big it could be. But I was trying to keep it simple. but I appreciate your more precise and expansive answer, although my answer was basically the same in that the OP can't use carryforward.