Understanding carry forward

zagfles

NoMore wrote: »

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).

See this is the confusion caused by considering different limits together.

If we ignore those subject to the MPAA or >150k taper, anyone who has been in a pension scheme in previous tax years and not used the full £40k annual allowance can use carry forwards. Even someone on £10k. Those are the AA rules.

But everyone is also subject to the tax relief limit. This is a different limit with different rules (eg doesn't have carry forwards). So for low earners, this will be the limit that constrains them rather than the AA. So the AA with its carry forwards rules is not relevant.

Like the national speed limit on dual carriageways of 70mph still applies to someone on a moped, but is not relevant to them as they're constrained by the limit of their vehicle which is much lower.

NoMore

OK, yes separate limits but one can restrict the other so they are not fully independent.

So (and I know I am maybe labouring the point and annoying you but I genuinely want to know) is there a situation where you are earning less than AA and can use carry forward (my current understanding is no, but am willing to accept there is some cases where you can) and also the same situation for above AA where you can't use carry forward (accepting there is carry forward available to be used in both situations)

And if the above answers are both no, then why is the do you earn more/less than 40k rubbish to easily establish whether somebody can use carry forward.

zagfles

NoMore wrote: »

OK, yes separate limits but one can restrict the other so they are not fully independent.

So (and I know I am maybe labouring the point and annoying you but I genuinely want to know) is there a situation where you are earning less than AA and can use carry forward (my current understanding is no, but am willing to accept there is some cases where you can) and also the same situation for above AA where you can't use carry forward (accepting there is carry forward available to be used in both situations)

And if the above answers are both no, then why is the do you earn more/less than 40k rubbish to easily establish whether somebody can use carry forward.

Someone earning £35k in the current local govt 1/49th CARE scheme who wants to put all their taxable income into a SIPP will have to use carry forwards. OK?

trampie

jamesd wrote: »

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.

What 40k ?, when the person earns 24k !
They then have this year's annual allowance of 24k plus 3 * 24k available if they were in a UK pension scheme and that was their earnings in those 3 years but they made no contributions in those years giving a total allowance of 96k over that period.

trampie

NoMore wrote: »

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).

Quite NoMore we would not want you giving wrong advice in the future - somebody can get tax relief on pension contributions of up to 100% of their earnings or a £40,000 annual allowance, whichever is lower.
As regards circumstances where you can use carry forward if you make full use of the current year’s annual allowance then a person can carry forward unused annual allowances from the three previous tax years, starting with the earliest.

zagfles

trampie wrote: »

What 40k ?, when the person earns 24k !
They then have this year's annual allowance of 24k plus 3 * 24k available if they were in a UK pension scheme and that was their earnings in those 3 years but they made no contributions in those years giving a total allowance of 96k over that period.

Complete rubbish.

zagfles

trampie wrote: »

Quite NoMore we would not want you giving wrong advice in the future - somebody can get tax relief on pension contributions of up to 100% of their earnings or a £40,000 annual allowance, whichever is lower.
As regards circumstances where you can use carry forward if you make full use of the current year’s annual allowance then a person can carry forward unused annual allowances from the three previous tax years, starting with the earliest.

NoMore did indeed not quite understand however he/she understands it far better than you do.

jamesd

trampie wrote: »

What 40k ?, when the person earns 24k !
They then have this year's annual allowance of 24k plus 3 * 24k available if they were in a UK pension scheme and that was their earnings in those 3 years but they made no contributions in those years giving a total allowance of 96k over that period.

The annual allowance is 40k a year. Earning 24k or 124k or 88k doesn't change the annual allowance.

This year's annual allowance for them is not 24k, it's 40k. 24k is earnings, not annual allowance. The annual allowance in the previous three years was also 40k. They are allowed to payy in and get tax relief on 24k this year because that's their pay and it's within the available allowance.

HMRC provides carry forward calculators. The current one for 2015-16 and later is here. You might like to try using it to confirm what I told you:

Check these boxes for years in a scheme:

6 April 2019 to 5 April 2020
6 April 2018 to 5 April 2019
6 April 2017 to 5 April 2018
6 April 2016 to 5 April 2017

Answer no to flexibly accessed.

Answer 0 for "How much were your pension savings from 6 April 2016 to 5 April 2017?" and the other three years. And answer no to "Was your threshold income more than £110,000 from 6 April 2016 to 5 April 2017?" when asked.

HMRC will then provide the answer:;

Year		Available 	Available 	Pension	Amount on 	Unused 
		annual		money		savings	which tax	annual
		allowance	purchase		is due		allowance
				annual		
				allowance	
6 April 2019 to  £160,000	£0		£0	£0		£120,000
5 April 2020
6 April 2018 to  £120,000	£0		£0	£0		£120,000
5 April 2019
6 April 2017 to  £80,000	£0		£0	£0		£80,000
5 April 2018
6 April 2016 to  £40,000	£0		£0	£0		£40,000
5 April 2017

HMRC doesn't ask about the 24k pay because that makes no difference to the answer.

Earnings and annual allowance must be considered separately to get the correct answer in all but the simplest of cases.

jamesd

zagfles was right in all respects.

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).

Right

Paul_Herring wrote: »

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, provided we assume that the threshold income wasn't over 110k so the annual allowance taper doesn't apply.

jamesd

trampie wrote: »

somebody can get tax relief on pension contributions of up to 100% of their earnings or a £40,000 annual allowance, whichever is lower.

Not quite. Somebody can get tax relief on pension contributions of up to 100% of their earnings if they have annual allowance, including carried forward allowance, available.

Employer contributions also use annual allowance.
For defined benefit schemes, they use 16 times the year's increase in benefit value of annual allowance.

Which is why wrote "annual allowance, including carried forward allowance, available". It's not just employee contributions which can use some of it. And it's possible in some situations for employer or DB value changes to cause the year's annual allowance to be less than 40k, though it's extremely unlikely to happen with 24k of pay, since a particular definition of income must exceed 110k first.