SIPP - annual allowance and carry forward

Tykva

Hiya
1. I've been contributing for more than 2 years now but I really struggle to understand how annual allowance limit is calculated. Could we please look into a hypothetical example to understand.
Let's say, in year 19/20 annual salary gross is £45000. Government set personal allowance is £12,500.  Workplace contribution is split as Employer pension contribution is 6%, Employee contribution is 6%. There is no other income.
Is this calculation correct? £45,000-£12,500=£32,500 because no income tax is paid on personal allowance.
Then £32,500-£2,700 (this sum is 6% of Employee contribution from £45K annual gross salary) = £29,800.
£29,800-20%=£23,840 is the maximum amount that can be deposited into SIPP in 19/20. Provider will claim 20% tax relief on this amount from HMRC which is the difference between £29,800-£23,840=£5,960.
Is this correct or where am I getting this wrong?
2. Workplace pension began in year 15/16. SIPP opened in year 18/19 and until now SIPP contributions were for the relevant year only. 
Do I understand it correctly that under the carry forward rule, within annual allowance limits 18/19  SIPP contribution can be accounted for as year 16/17 contribution, 19/20 as year 17/18, and in 20/21 contributions can include annual allowance limits for 18/19, 19/20 and 20/21?
Is my understanding of the rule correct? 
Many thanks.
Are there HMRC manuals on SIPPs? All of the above is what I have understood from SIPP provider leaflets which are quiet concise. I assume HMRC elaborates more.

bigadaj

No the amount you can contribute to your pension is limited to your employment earnings for the year. If you earn more than £40k then carry forward can be used to allow contributions above £40k based on what was contributed in earlier years, so the whole of the current year allowance is usd up, then the oldest of the years available for carry forward. 

Albermarle

Regarding Point 1 , you can ignore the personal allowance in this calculation as you can claim tax relief on your whole taxable salary. So £45,000 minus £2700 = £42,300 still can be added gross to your Sipp , so £33,840 net .
So you if you did this then your total contribution to your SIPP this tax year would be £45,000 + you employers contribution of 6% = £47,700 .
So to be able to do this you would have to carry forward some allowance ( assuming you did not add £40K in previous years ) from previous years as in Point 2 .
I think that is correct anyway .

zagfles

For the annual allowance, you carry forwards unused allowance, you don't carry back contributions. You need to include employer contributions and the grossed up value of any personal contributions. You can use a carry forwards calculator to see what carry forwards you have eg https://www.hl.co.uk/pensions/contributions/carry-forward-rule/annual-allowance-calculator

But note that there is also a separate limit on tax relief, this is nothing to do with the annual allowance and has completely different rules (eg employer contributions don't count, no carry fowards etc). You can't get tax relief on more than 100% of earnings, so that is Albermarle's calculation in the first paragraph above, your earnings minus your contributions. Theoretically you can contribute more and not get tax relief, but you will struggle to find a provider who accepts contributions on that basis.

HMRC have the Pension Tax Manual here https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual

Tykva

Thank you everyone for the comments, I hope I made progress understanding.

Albermarle said:

Regarding Point 1 , you can ignore the personal allowance in this calculation as you can claim tax relief on your whole taxable salary. So £45,000 minus £2700 = £42,300 still can be added gross to your Sipp , so £33,840 net .
So you if you did this then your total contribution to your SIPP this tax year would be £45,000 + you employers contribution of 6% = £47,700 .
So to be able to do this you would have to carry forward some allowance ( assuming you did not add £40K in previous years ) from previous years as in Point 2 .
I think that is correct anyway .

Wow, interesting to learn about the personal allowance and employer's contribution! So employer pension contribution increases one's gross salary for SIPP purposes.
Summing up the initial example in question:
£45,000+6% (employer contribution)=£47,700 is the gross salary for SIPP purposes, meaning that the total annual SIPP allowance of £40K can potentially be utilised by topping SIPP for £40K-20% (tax relief that will be claimed from HMRC)= £32,000. 

Workplace employee contribution of 6% or £2,700 needs to be deducted from this because that has received tax relief already. 
So, £40K-(£2,700+25%)=£36,625-20% (tax relief that will be claimed from HMRC)=£29,300 is the amount that can be contributed into SIPP for which the provider will claim tax relief from HMRC. 

Does this look correct?

Tykva

zagfles said:

For the annual allowance, you carry forwards unused allowance, you don't carry back contributions. You need to include employer contributions and the grossed up value of any personal contributions. You can use a carry forwards calculator to see what carry forwards you have eg https://www.hl.co.uk/pensions/contributions/carry-forward-rule/annual-allowance-calculator

But note that there is also a separate limit on tax relief, this is nothing to do with the annual allowance and has completely different rules (eg employer contributions don't count, no carry fowards etc). You can't get tax relief on more than 100% of earnings, so that is Albermarle's calculation in the first paragraph above, your earnings minus your contributions. Theoretically you can contribute more and not get tax relief, but you will struggle to find a provider who accepts contributions on that basis.

HMRC have the Pension Tax Manual here https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual

Does carry forward means that if in year 18/19 whilst my annual SIPP allowance was £40K but I have only contributed £32K, in year 19/20 my SIPP annual allowance potentially became £48K?
I think the condition that is confusing me here is the second one 'There are two conditions. First, you must earn at least the amount you wish to contribute in total this tax year (unless your employer is making the contribution). Second, you must have been a member of a UK-registered pension scheme (this doesn’t include the State Pension) in each of the tax years from which you wish to carry forward.'. What is being emphasised or I should pay attention at here?
Sorry for elaborating into such details, I just really don't get it. Thank you very much.

Albermarle

So employer pension contribution increases one's gross salary for SIPP purposes.

I did not say that .

I said that after your contribution and tax relief is added, you also need to add the employers contribution , to compare with the annual allowance of £40K.

For example if your salary is £45K and then you add the maximum , which is £45K gross ( including tax relief)  .

However for Annual allowance purposes/calculation you have to add on your employer contributions of 6% as well.

zagfles

Tykva said:

zagfles said:

For the annual allowance, you carry forwards unused allowance, you don't carry back contributions. You need to include employer contributions and the grossed up value of any personal contributions. You can use a carry forwards calculator to see what carry forwards you have eg https://www.hl.co.uk/pensions/contributions/carry-forward-rule/annual-allowance-calculator

But note that there is also a separate limit on tax relief, this is nothing to do with the annual allowance and has completely different rules (eg employer contributions don't count, no carry fowards etc). You can't get tax relief on more than 100% of earnings, so that is Albermarle's calculation in the first paragraph above, your earnings minus your contributions. Theoretically you can contribute more and not get tax relief, but you will struggle to find a provider who accepts contributions on that basis.

HMRC have the Pension Tax Manual here https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual

Does carry forward means that if in year 18/19 whilst my annual SIPP allowance was £40K but I have only contributed £32K, in year 19/20 my SIPP annual allowance potentially became £48K?

Yes (but you need to include employer contributions).

I think the condition that is confusing me here is the second one 'There are two conditions. First, you must earn at least the amount you wish to contribute in total this tax year (unless your employer is making the contribution).

This condition is the separate limit on tax relief I mentioned above. It's not part of the annual allowance, it's a separate independant limit defined in different legislation. As such, concepts like carry forwards don't apply to it, as carry forwards is a feature of the annual allowance.

Second, you must have been a member of a UK-registered pension scheme (this doesn’t include the State Pension) in each of the tax years from which you wish to carry forward.'. What is being emphasised or I should pay attention at here?

This is to do with the annual allowance, you need to have been in a pension scheme in the previous years to use carry forwards from those years. It doesn't have to be the same scheme you are now contributing to.

Tykva

Albermarle said:

So employer pension contribution increases one's gross salary for SIPP purposes.

I did not say that .

I said that after your contribution and tax relief is added, you also need to add the employers contribution , to compare with the annual allowance of £40K.

For example if your salary is £45K and then you add the maximum , which is £45K gross ( including tax relief)  .

However for Annual allowance purposes/calculation you have to add on your employer contributions of 6% as well.

Thank you for the clarification. Is this correct then?

£45,000+6% (employer contribution)=£47,700 is the gross salary for SIPP annual allowance purposes, meaning that the total annual SIPP allowance of £40K can potentially be utilised by topping SIPP for £40K-20% (tax relief that will be claimed from HMRC)= £32,000. 

Workplace employee contribution of 6% or £2,700 needs to be deducted from this because that has received tax relief already. 
So, £40K-(£2,700+25%)=£36,625-20% (tax relief that will be claimed from HMRC)=£29,300 is the amount that can be contributed into SIPP for which the provider will claim tax relief from HMRC. 

Albermarle

I think you are a little bit mixing up two separate issues.
1) What you can claim tax relief on 
2) Independent from point 1) there is annual limit of £40K that you can add to a pension . This includes your contribution ( either regular % contributions from salary and/or lump sums ) + any tax relief paid into the pension + your employers contributions.
If you have not added £40K in the last three tax years , you can bring unused allowance into the current tax year . However you can not use this increased allowance unless you have enough taxable earnings to cover increased contributions. 

Tykva

Albermarle said:

I think you are a little bit mixing up two separate issues.
1) What you can claim tax relief on 
2) Independent from point 1) there is annual limit of £40K that you can add to a pension . This includes your contribution ( either regular % contributions from salary and/or lump sums ) + any tax relief paid into the pension + your employers contributions.
If you have not added £40K in the last three tax years , you can bring unused allowance into the current tax year . However you can not use this increased allowance unless you have enough taxable earnings to cover increased contributions. 

Thank you, yes, I might be although I'm trying to understand what I can claim first. Hopefully, it will make easier to understand Carry forward afterwards. Is my understanding of calculation of the tax relief claim looks right?

£45,000+6% (employer contribution)=£47,700 is the gross salary for SIPP annual allowance purposes, meaning that the total annual SIPP allowance of £40K can potentially be utilised by topping SIPP for £40K-20% (tax relief that will be claimed from HMRC)= £32,000. 

Workplace employee contribution of 6% or £2,700 needs to be deducted from this because that has received tax relief already. 
So, £40K-(£2,700+25%)=£36,625-20% (tax relief that will be claimed from HMRC)=£29,300 is the amount that can be contributed into SIPP for which the provider will claim tax relief from HMRC.