Trailing carry forward?

snarffie

Hi,

I’m trying to understand how exactly the carry forward rules work and hope somebody can give me some clarity, please  My earnings and pension contributions from the last 3 years were as follows:

2017-2018 earnings £40k. £5k in total paid into stakeholder pension.
2018-2019 earnings £40k. £10k in total paid into stakeholder pension.

2019-2020 earning £8632 (1st year of limited company) £0 paid into pension.

I think I should have £35K+£30K+£40k of carry forward allowance based on the above numbers, but I am not able to use all of it in one year, so I wanted to make the following contributions from my limited company (effectively trailing the carry forward dates if that’s allowed)

2020-2021 Pay £40k+£35k into pension (carried forward from 2017/18)
2021-2022 Pay £40k+£30k into pension (carried forward from 2018/19)
2022-2023 Pay £40k+£40k into pension (carried forward from 2019/20)
2023 onwards max out at £40k per annum.

Hope that all makes sense-but does it work!

Thanks

AnotherJoe

How much will you earn this year? Because you can only use carry forward within that tax years income.

If you earn £60k, there's an extra £20k there you can use. If its (say)  £30k  well then you are out of luck this year.

I dont know if its any different for a ltd company, but i suspect not.

snarffie

I am now a director of a limited company, so my ‘relevant earnings’ for this year (£8632pa) are low.  The pension contribution will therefore come direct from the company as an allowable expense with a maximum of £40k pa.

AnotherJoe

Ok, so (bear in mind I am neither an accountant nor a tax professional) if the max the company can pay is £40k you are out of luck to use previous years under payments. I think you will need to speak to someone who is one if those professions to see if there's a way round. 

snarffie

Thanks AnotherJoe. Of course, you’re right-I need to speak to our accountant to be sure. It was just a late night thought (I know I can carry forward-just not sure if it trails in the way I’m hoping or a one-off). 

zagfles

The carry forwards figures look right. There are loads of carry forwards calculators you can use eg https://www.hl.co.uk/pensions/contributions/carry-forward-rule/annual-allowance-calculator

But you say the conts will come from the company with max £40k, why max £40k, where will the rest come from? If you make personal/employee contributions you can't get tax relief on more than 100% of your relavent earnings, so unlikely to be tax efficient to pay in more than 100%.

Albermarle

Of course, you’re right-I need to speak to our accountant to be sure. I

There are  previous threads on the forum , where accountants have given the wrong pensions advice. It is not their area of expertise so just be aware of that . Of course your accountant may understand pensions perfectly .

dunstonh

Company directors of own company are not restricted by what they earn.  They get the full allowances as long as its a company contribution.   However, the company needs to have earnings by way of business to be eligible  and it will only reduce the Corporation tax bill by what has been paid.  e.g. if the company profit is £10,000 then only £10,000 on pension contribution will qualify for tax reduction.   There are scenarios where exceeding the profit can make sense but in most cases, you would not contribute above your profit.

snarffie

Thanks dunstonh.

That’s exactly what we are doing, and earnings are currently covering the proposed contributions.

Do you know if the carry forward ‘trails’ in the way I have shown?

bowlhead99

snarffie said:

Do you know if the carry forward ‘trails’ in the way I have shown?

Yes it can 'trail' like that. 

Where the annual allowance is exceeded in a tax year and you need to have some unused carry forward available from the previous 3 tax years, it's the unused allowance from the earliest year that is used first. So if in 2020/21 you had gross contributions of 75k, that would consume all the 2020/21 allowance, and take 35 from 2017/18 if 2017/18 had enough spare to cover the whole 35, but if 2017/18 didn't have enough spare to cover the whole 35, it would start to take from 2018/19 spare allowance and then 2019/20 spare allowance.

So if you like you can 'trail' the contributions along, each year using the current allowance and the longest-ago unused allowance as you have shown, until there's no more unused allowance. You don't have to do it like that though (picking current year and one other year), as - subject to available gross salary and company profits capacity - you could instead do (say) 100k which would take 40 from 20/21, then 35 from 17/18 and 25 of the 18/19, leaving a spare 5k from 18/19 and all the 40k from 19/20 untouched.  The principle is just that you use up the oldest 'previous year unused' amount first, as long as you exceed the 'current year' 40k. 

If you don't exceed the 'current year' 40k in a tax year you can't go back and use unused older amounts from other years because you must use your current allowance first;  you would just gradually lose them as they each fell off the end of the calculation by becoming too old to be used. 

snarffie

Brilliant bowlhead- so clear and helpful!
Thanks