Carry forward - steps and tax relief

btcp

I am close to my 40k annual pension contribution and was planning to add more using carry forward principle. I am looking at the previous 3 years and see that I unused around 30k total. 

1. How does tax relief works on this carry forward contribution, does my pension provider automatically adds 25% or do I need to ask them? I was palling transfer additional amount.
2. Also I am a higher rate tax payer, will I get additional tax relief  or is that lost? 
3. HMRC website says I don’t need to tell them about it. Do I just make my personal notes on which year allowance I am carrying forward?

Thanks!

Dazed_and_C0nfused

1.  Just like any other contribution, you can only ever get tax relief for the tax year you make the contribution in.

2.  If additional relief is due then you will be entitled to it.  How you get it depends on a few things.  Do you currently complete Self Assessment returns?  It would only be "lost" if you failed to make a claim for it by the relevant time limits (four years after the end of the tax year).

3.  Tell them about what?  You don't tell them about carry forward but must keep records in case you ever need to explain to them why you have paid more than £40k.  But you cannot get any higher rate relief due without telling them.

btcp

Dazed_and_C0nfused said:

1.  Just like any other contribution, you can only ever get tax relief for the tax year you make the contribution in.

Maybe I am missing some fundamentals here. What’s the point of using carry forward if I don’t get tax relief on the amount I am adding  on top of my 40k? I could invest these money where if there is no tax benefit? 

I do fill Self assessment. 

Thanks!

Albermarle

Whether you can use the £30K carry forward ( so £70K in total ) depends on whether your earned taxable income is high enough this tax year .
As an example if you earned £20K pa and put it all in your pension for the last three years , you could in theory carry forward £60K and add it to this years £40K to make a £100K
However if you still only earned £20K his year , the max you can add would be £20K gross, so the carry forward would be irrelevant .
( I am ignoring employer contributions just to make the general point)

Dazed_and_C0nfused

btcp said:

Dazed_and_C0nfused said:

1.  Just like any other contribution, you can only ever get tax relief for the tax year you make the contribution in.

Maybe I am missing some fundamentals here. What’s the point of using carry forward if I don’t get tax relief on the amount I am adding  on top of my 40k? I could invest these money where if there is no tax benefit? 

I do fill Self assessment. 

Thanks!

Why do you think you would not get any tax relief?

You can only ever get tax relief in the tax year you make the contribution in so if you are (personally) eligible to contribute say £60k (gross) and make a (net) contribution of £48k then the pension company will add £12k basic rate tax relief.

Any personal tax benefit to you will be based on your total taxable income in the tax year you make the contribution in.  What happened in previous tax years has absolutely no relevance to the tax relief you are entitled to in the current tax year.

If you are currently employed and expect to complete Self Assessment return then you have a couple of choices with regard to any personal relief you are entitled to.  Either provisionally drip fed through less PAYE tax or a lump sum once you complete your Self Assessment return.

Which ever your preference is you will still need to include details of the contribution on your Self Assessment return.

HMRC will assume you will make a similar contribution in the next tax year so when your 2020:21 tax return is filed they will update your 2021:22 tax code to give tax relief provisionally for that tax year.  That change to your tax code is NOT allowing tax relief for the contribution you make in 2020:21.

btcp

Albermarle said:

Whether you can use the £30K carry forward ( so £70K in total ) depends on whether your earned taxable income is high enough this tax year .
As an example if you earned £20K pa and put it all in your pension for the last three years , you could in theory carry forward £60K and add it to this years £40K to make a £100K
However if you still only earned £20K his year , the max you can add would be £20K gross, so the carry forward would be irrelevant .
( I am ignoring employer contributions just to make the general point)

That’s clear to me thank you. I wasn’t planning to pay in the entire 30k, I don’t have enough cash.I was plan i g to start using allowance from the year 3 year back, which is 20k but probably will end up paying 10 and lose the other 10. I earn around 100k so should be fine with the limits. 

btcp

Dazed_and_C0nfused said:

btcp said:

Dazed_and_C0nfused said:

1.  Just like any other contribution, you can only ever get tax relief for the tax year you make the contribution in.

Maybe I am missing some fundamentals here. What’s the point of using carry forward if I don’t get tax relief on the amount I am adding  on top of my 40k? I could invest these money where if there is no tax benefit? 

I do fill Self assessment. 

Thanks!

Why do you think you would not get any tax relief?

You can only ever get tax relief in the tax year you make the contribution in so if you are (personally) eligible to contribute say £60k (gross) and make a (net) contribution of £48k then the pension company will add £12k basic rate tax relief.

Any personal tax benefit to you will be based on your total taxable income in the tax year you make the contribution in.  What happened in previous tax years has absolutely no relevance to the tax relief you are entitled to in the current tax year.

If you are currently employed and expect to complete Self Assessment return then you have a couple of choices with regard to any personal relief you are entitled to.  Either provisionally drip fed through less PAYE tax or a lump sum once you complete your Self Assessment return.

Which ever your preference is you will still need to include details of the contribution on your Self Assessment return.

HMRC will assume you will make a similar contribution in the next tax year so when your 2020:21 tax return is filed they will update your 2021:22 tax code to give tax relief provisionally for that tax year.  That change to your tax code is NOT allowing tax relief for the contribution you make in 2020:21.

Because I asked if my pension company will add 25% tax relief to the amount on top of my 40k contribution, and your answer was not too direct. I misread it and after you explained the above, it looks like the pension company ignore 40k limit and add 25% to whatever is contributed. I was just not clear if they need to check if I am eligible for this additional payment, I.e. if I am not they would probably not add the relief? 

In terms of the HMRC assumptions for the next year, can I tell them I am not going to contribute the same amount? I am not sure how much cash I will have available next year. 

Dazed_and_C0nfused

You can, either by ticking a box on the return or if a 2021:22 tax code is issued with pension relief entry simply ask them to remove it.

You would be surprised how many people post on here assuming you get tax relief by reference to the year(s) they are carrying forward from.  All that carry forward does is allow you to contribute more in the current tax year, any tax relief is based on your tax position in the current tax year.

Albermarle

 it looks like the pension company ignore 40k limit and add 25% to whatever is contributed. I was just not clear if they need to check if I am eligible for this additional payment, I.e. if I am not they would probably not add the relief? 

They might well call /e mail you to warn you that you will be going over the £40K annual allowance . They are just covering their backs in case you have no idea what you are doing. If you just tell them you fully understand and have some allowance to carry forward it should be fine.

btcp

Dazed_and_C0nfused said:

You can, either by ticking a box on the return or if a 2021:22 tax code is issued with pension relief entry simply ask them to remove it.

You would be surprised how many people post on here assuming you get tax relief by reference to the year(s) they are carrying forward from.  All that carry forward does is allow you to contribute more in the current tax year, any tax relief is based on your tax position in the current tax year.

I probably wouldn’t figure it out without you telling me either, but it does make sense. It would be too complicated to track back income and recalculate tax. So they simply add a basic tax relief and that’s all you get.

Dazed_and_C0nfused

No 🤔.

The company adds basic rate tax relief and then (keeping things as simple as possible) you include details of the gross contribution on your Self Assessment return.

The gross contribution increases the amount of your basic rate tax band, which can reduce the amount of higher rate tax payable.  But the exact personal benefit is wholly dependant on your overall tax position for that year.  The one you make the contribution in.  What has happened in the 3 previous tax years is irrelevant as far as the tax relief is concerned.

You may get some 60% tax relief, you may get some 40% relief or you might get no extra relief.  

Plenty of posters seem to think if you a higher rate payer you get an "extra 20%" but if you contribute say £60k (gross) and pay higher rate tax on say £5.00 you would be sorely disappointed by the personal tax saving (£1.00)