Using Past Allowance

tryingtogetmyheadaround

I have a old work pension from when I used to work for an old employer. I haven't added to this pot in 6 years.
I now wish to set up a SIPP and pay in moving forward.
My question is regarding using up past allowance. As I understand it, I can use unused past allowance.
2019/20 PAYE £12500 take home - no pension contributions 
2018/19 PAYE £12500 take home - no pension contributions 
2017/18 PAYE £12500 take home - no pension contributions 
2016/17 PAYE £12500 take home - no pension contributions 
I understand the maximum allowance is £40K in 1 year.... so do I need to meet the £40K in 2019/20 to be able to use my past allowances?
What I was thinking I just want to go to £12500 x 4 (This financial year and the past 3 financial years) Then get the maximum tax benefit, by putting £40,000 (£10,000 per year) into a pension today???
Or have I miss understood the whole personal allowance system.
Thanks

Albermarle

Or have I miss understood the whole personal allowance system.

Yes you have misunderstood, like many people.

The critical point is that you can not claim more tax relief in a tax year - 20/21 for example - than tax you have paid .

This is regardless of what happened in previous years . 

NottinghamKnight

Albermarle said:

Or have I miss understood the whole personal allowance system.

Yes you have misunderstood, like many people.

The critical point is that you can not claim more tax relief in a tax year - 20/21 for example - than tax you have paid .

This is regardless of what happened in previous years . 

You can claim more tax than you have paid, your gross contribution however cannot exceed your relevant earnings, normally salary. So people get tax relief on contributions made below the personal allowance in a personal pension or sipp.

Dazed_and_C0nfused

Albermarle said:

Or have I miss understood the whole personal allowance system.

Yes you have misunderstood, like many people.

The critical point is that you can not claim more tax relief in a tax year - 20/21 for example - than tax you have paid .

This is regardless of what happened in previous years . 

You definitely can.

Going off the posts on this board a significant proportion of the country are doing this to gain £720 tax relief each year as non tax payers.

Albermarle

NottinghamKnight said:

Albermarle said:

Or have I miss understood the whole personal allowance system.

Yes you have misunderstood, like many people.

The critical point is that you can not claim more tax relief in a tax year - 20/21 for example - than tax you have paid .

This is regardless of what happened in previous years . 

You can claim more tax than you have paid, your gross contribution however cannot exceed your relevant earnings, normally salary. So people get tax relief on contributions made below the personal allowance in a personal pension or sipp.

Yes you explained it better /more accurately .

SilverSix

NottinghamKnight said:

Albermarle said:

Or have I miss understood the whole personal allowance system.

Yes you have misunderstood, like many people.

The critical point is that you can not claim more tax relief in a tax year - 20/21 for example - than tax you have paid .

This is regardless of what happened in previous years . 

You can claim more tax than you have paid, your gross contribution however cannot exceed your relevant earnings, normally salary. So people get tax relief on contributions made below the personal allowance in a personal pension or sipp.

Just to provide clarity, in order to use all your previous allowances your earnings for the year must be equal to or greater than them.
This is said above but having used back allowances myself for the last & current fiscal years this small detail isn't made overly obvious.
If you have £80k of unused allowances but earn £30k the amount you will be able to contribute (gross) is £30k not £80k

Asghar

tryingtogetmyheadaround said:

I understand the maximum allowance is £40K in 1 year.... so do I need to meet the £40K in 2019/20 to be able to use my past allowances?

Yes, but only if you earned £40k in that tax year. If you only earned £12,500, then that is the most you can contribute and no more. The carry forward allowance is irrelevant to you as you are not earning enough.

If you wanted to maximise the contributions you missed for the last three years, then you would have to earn a salary of £77,500 this tax year. £40k would go into this years allowance and then the £37,500 (12,500 x 3) for the previous three years.

tryingtogetmyheadaround

Thanks all. I didn't think it was that simple.

ifonlyian

How does this work for a limited company director?
assuming the £12,500 is the minimum salary for NI, then if the business then contributes £27,500 for FY20/21 for a total of £40,000 what can be claimed for the 3 previous years to carry forward?
my salary's vary for the 3 previous years as i was a paye for approx. 26 months & a director for 10 months
To keep it simple assume & using the oldest first
FY17/18 Salary £45000 Pension Paid £3600
FY18/19 Salary £45000 Pension Paid £3900 
FY19/20 Salary £15000 - Pension paid £12000
Thanks

dunstonh

How does this work for a limited company director?
assuming the £12,500 is the minimum salary for NI, then if the business then contributes £27,500 for FY20/21 for a total of £40,000 what can be claimed for the 3 previous years to carry forward?

Shareholding directors dont have to worry about salary as it would be the company that is contributing.   So, the full £40k allowance is available and carry forward for the 3 previous years.  So, assuming carry forward qualification is met and there have been no contributions for current and past three years then £160k can be made by the company.

Do note that you have to consider tax efficiency.   For example, if the company has £78,000 profit then there is no point making a company contribution of £100k.  That said, there may be some accountancy adjustments possible that could allow you to make adjustments.  Your accountant can confirm if that becomes necessary.

If you are not a shareholding director, then there may be some restrictions on what you can contribute relative to your role.  HMRC leave that bit vague.  For example, a non-shareholding spouse director who is on the books as a cleaner or secretary could find a £40k pension contribution questioned.

ifonlyian

Thanks, what is behind this, is that i am due to receive several lump sums of personal money in the next 6-18 months & i am thinking if i can carry forward any of the previous years of low pension contributions from when i was a normal paye employee & not a shareholding company director as i am now. so for the previous years the carry forward would come from personal money into the SIPP if possible, not from the business. Failing that, i assume i can not pay myself any dividends & use that money to go into my SIPP & not use my personal money for that purpose?
FY17/18 & FY 18/19 was a paye & employers/employee pension contribution
FY19/20 was a mixture of a paye & employers/employee pension contribution & then topped up with payments from my limited company as it was only formed in June 2019