Understanding carry forward

trampie

zagfles wrote: »

Here's a silly analogy.

The speed limit on a road is 40mph. Every 4 miles there's an average speed camera that checks you've not averaged over 40mph in the last 4 miles.

So if you go 20mph for 3 miles, then if you go 60mph for the next mile you'll be OK. (carry forwards!)

That's a bit like the annual allowance.

BUT you're on a moped that can only do 30mph. So the speed limits don't matter, you're constrained by the limits of your vehicle, a different limit, which is lower.

Even if you go 20mph for a bit, your moped still can't over 30mph to make up for it, you're still stuck at 30mph as the max.

That's like the tax relief limit.

There are 2 separate limits with different rules. The speed limit and your vehicle's limit.

That's like the annual allowance, and the tax relief limit.

:cool:

Two different limits but can the thread starters other half use carry forward ?

HappyHarry

trampie wrote: »

If they earn £24k and have earned the same amount for the last 4 or 5 years and pay £24k into their pension pot this tax year but in the 3 previous tax years they did not pay £24k into their pension pot, could they not make the difference up by carrying forward their unused allowances for the last 3 tax years ?

No.

(Text added to make post long enough)

jamesd

trampie wrote: »

If they earn £24k and have earned the same amount for the last 4 or 5 years and pay £24k into their pension pot this tax year but in the 3 previous tax years they did not pay £24k into their pension pot, could they not make the difference up by carrying forward their unused allowances for the last 3 tax years ?

They then have this year's annual allowance of 40k plus 3 * 40k available if they were in a pension scheme but made no contributions for a total allowance of 160k.

They can pay all 24k into a pension without having to pay the annual allowance charge because 24k is within the available 160k.
With the same previous three years a person earning 88k this tax year could pay in 88k because that's within 160k.
A person earning 24k who paid in 88k and sought tax relief for it all would be contacted by HMRC about their tax fraud because it's within the available 160k allowance but more than the 24k earned this year on which tax relief is permitted; if they noticed before HMRC they could ask the pension scheme to refund the part over 24k, without penalty.

Paul_Herring

They can pay all 24k into a pension without having to pay the annual allowance charge because 24k is within the available 160k.

Something that's been niggling me, and it's certainly a corner case - an employer could certainly contribute on their behalf an additional (40-24) £16K this tax year (which would actually be the case if they were actually paid £40K, but sacrificed that £16K for example).

But could that same employer, in this specific example, also contribute in the same fashion an extra £120K to absorb the remainder of the available allowance? (I realise that these numbers will result in bumping up against the £110K/£150K limits for the current tax year, but it's the principle I'm after - if a person has carry-forward, is it possible for them to be 'paid' under £40K, but have their employer contribute above that limit to absorb the carry-forward.)

zagfles

Paul_Herring wrote: »

Something that's been niggling me, and it's certainly a corner case - an employer could certainly contribute on their behalf an additional (40-24) £16K this tax year (which would actually be the case if they were actually paid £40K, but sacrificed that £16K for example).

But could that same employer, in this specific example, also contribute in the same fashion an extra £120K to absorb the remainder of the available allowance? (I realise that these numbers will result in bumping up against the £110K/£150K limits for the current tax year, but it's the principle I'm after - if a person has carry-forward, is it possible for them to be 'paid' under £40K, but have their employer contribute above that limit to absorb the carry-forward.)

Yes! This is why I keep banging on at people who post rubbish like "you can only use carry-forwards if you earn under £40k".

The tax relief limit (£3600/100% of earnings) does not include employer's contributions. Employer's conts are ONLY relevant for the annual allowance. So someone with low salary but high employer contributions could use carry forwards.

Realistically, it would apply eg to someone in a DB scheme earning around £35k.

Paul_Herring

"you can only use carry-forwards if you earn under £40k".

I believe the grey area is whether those contributions count as 'earnings' when they're[1] talking about it.

In the £40K, but salary-sacrificing £16K, case I alluded to in my previous post, the £16K would normally, colloquially, be seen as earnings.

But if someone was 'normally' earning £24K, then the employer (for whatever imaginary reason) decided to contribute £16K out of the goodness of their heart, it probably wouldn't be seen as such.

Thing is, those two situations are identical.


[1] whoever's doing the talking at that moment in time, of course.

zagfles

Paul_Herring wrote: »

I believe the grey area is whether those contributions count as 'earnings' when they're[1] talking about it.

In the £40K, but salary-sacrificing £16K, case I alluded to in my previous post, the £16K would normally, colloquially, be seen as earnings.

But if someone was 'normally' earning £24K, then the employer (for whatever imaginary reason) decided to contribute £16K out of the goodness of their heart, it probably wouldn't be seen as such.

Thing is, those two situations are identical.


[1] whoever's doing the talking at that moment in time, of course.

The two situations are identical and treated identically! There is no "grey area". The tax relief limit (100% earnings/3600) is a limit on personal tax relief. You don't get personal tax relief on employer contributions so they're completely irrelavant to the tax relief limit. Only to the AA.

It's all this rubbish that tries to merge the two separate limits into one that confuses people. If you just think about them separately, it all makes sense.

NoMore

@zagfles Although you are right, I would not say its totally rubbish, it may not be entirely correct, but as a rough rule of thumb for 90%(?) of people is it not appropriate ? Although not technically the right answer, it still gets them what they need to know.


I am understanding the principle you are getting at, especially people with DB schemes but I am struggling to understand the application in this case. So with a DB scheme you could have Employer Contributions in excess of the Annual Allowance but still have a low salary, is that the where you disagree with the 40k 'rubbish'. but in this case can the individual themselves make use of Carry forward ( despite their income is low) or is it always the employer who uses the carry forward ? If its the employer then this really doesn't matter in almost 100% of questions asked in this forum , as they are always similar to the OP's where the individual themselves want to try and use carry forward. In which case the 40k rule of thumb is useful to quickly give them an answer ?

zagfles

NoMore wrote: »

@zagfles Although you are right, I would not say its totally rubbish, it may not be entirely correct, but as a rough rule of thumb for 90%(?) of people is it not appropriate ? Although not technically the right answer, it still gets them what they need to know.

But is doesn't! It causes exactly the confusion you see in this thread and others.

I am understanding the principle you are getting at, especially people with DB schemes but I am struggling to understand the application in this case. So with a DB scheme you could have Employer Contributions in excess of the Annual Allowance but still have a low salary, is that the where you disagree with the 40k 'rubbish'. but in this case can the individual themselves make use of Carry forward ( despite their income is low) or is it always the employer who uses the carry forward ? If its the employer then this really doesn't matter in almost 100% of questions asked in this forum , as they are always similar to the OP's where the individual themselves want to try and use carry forward. In which case the 40k rule of thumb is useful to quickly give them an answer ?

The "employer" doesn't "use" carry forwards! Carry forwards is part of the annual allowance, which imposes tax on individuals who exceed the limits. Employer contributions (or increase in DB pension value) count towards an individual's pension input amount which is tested against the AA.

For low earners, it can be simplified by saying the AA is not an issue so they just need worry about the tax relief limit (100% earnings/3600). Unless strange circumstances, eg very generous employer pension scheme/contributions.

But "low earners" doesn't mean under £40k. It can be significantly lower, perhaps down to £30k or less if a good DB scheme.

NoMore

Sorry Zagfles you are obviously very knowledgeable on this subject and I really want to understand so I can not give wrong advice in the future.


So I hope you don't mind me asking more questions, lets switch this round, under what circumstances can you use carry forward ? Rather than describing when you can't. I thought I knew the answer but maybe I am misunderstanding it (not unusual).