Self Employed pension query - carry forward rule

Mick70

Hi all, 
my wife is self employed and currently has little pension provision and I'm trying to get this built up.
I kind of know how the 3 year carried forward rule works , but unsure how it applies if self employed.  I realise I can only pay in the limit of what her net profit is likely to be for that year .
She has a scottish widows pension from the early 90s that has never been contributed into since (became self employed then).  I opened a vanguard SIPP a year ago for her .
2017/18  Net Profit  £5.5k       pension conts   nil
2018/19   NP   £5k                 pension conts nil 
2019/20   NP   £8K               pension conts  £7.5k  (into new vanguard sipp)
2020/21  NP Est £10k          pension conts £9.4k  (paid in a few weeks ago rather than wait until end of march next year)

The question I have is ,  can I use the 3 year rule in this scenario to pay in another £5k  as this would take her well above her earnings for 2020/21  ?

Many Thanks for advice,
Mick

Asghar

Mick70 said:

 I realise I can only pay in the limit of what her net profit is likely to be for that year .

Yes, the limit is the profit for the tax year, so why ask if you can pay in another £5k?

If the net profit is going to be £10k, then the most you can contribute is £8k yourself which will get top up with £2k tax relief to make £10k gross.

The first £40k of pension contributions always go into the current tax year, so the carry forward rules are irrelevant in your case.

If you were to earn £45k then you would have to contribute the full £45k, £40k would be the limit for this tax year and then the extra £5k would then carry forward into previous years.

I hope the £9.4k was not the actual amount you invested and it was instead £7520 which was topped up to £9400 with the tax relief received.

Tealblue

Short answer is no, I'm afraid. See https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/carry-forward for more detailed info.

If building up a pension is a priority, then she might want to consider changing from self employed to working via her own limited company, which would mean bigger contributions could be made by the company on her behalf once the company has the resources to do so. It's not expensive or onerous to do. See https://www.gov.uk/set-up-limited-company

Marcon

Mick70 said:

Hi all, 
my wife is self employed and currently has little pension provision and I'm trying to get this built up.
I kind of know how the 3 year carried forward rule works , but unsure how it applies if self employed.  

I'm afraid you don't quite grasp how the carry forward rule works. It can't be used here.

dunstonh

The question I have is ,  can I use the 3 year rule in this scenario to pay in another £5k  as this would take her well above her earnings for 2020/21  ?

No.  To use carry forward, you have to be earning over £40,000 a year.

If she earns £10k (net profit) then the most she can pay into a pension to get tax relief is £10k (gross).

Mick70

thanks all and yes i agree i clearly didn't understand it

Mick70

Mick70 said:

 I realise I can only pay in the limit of what her net profit is likely to be for that year .

Yes, the limit is the profit for the tax year, so why ask if you can pay in another £5k?

If the net profit is going to be £10k, then the most you can contribute is £8k yourself which will get top up with £2k tax relief to make £10k gross.

The first £40k of pension contributions always go into the current tax year, so the carry forward rules are irrelevant in your case.

If you were to earn £45k then you would have to contribute the full £45k, £40k would be the limit for this tax year and then the extra £5k would then carry forward into previous years.

I hope the £9.4k was not the actual amount you invested and it was instead £7520 which was topped up to £9400 with the tax relief received.

i now realise that most you can pay in is the net profit for that single year  -  and the contribution INCLIUDES the govt tax relief... !!!!!! 

thanks all