Is higher rate tax relief with carry forward limited by the current year's income?

janeskips2

Suppose 70k is paid into SIPP in the current year as 40k from the current year allowance and 30k from last year's unused allowance. Suppose income in both the current and previous year was 75k. From a higher rate tax relief point of view, would it have been better to pay in 35k both years rather than the 70k lump sum in year 2 or does it not make a difference?

NottinghamKnight

Your payment is made on a yearly basis, ie tax relief is based on the earnings or that year. The allowance can be carried forward if earnings are sufficient in the current year, but the payment is gross meaning you only save tax in accordance with the income tax bands. In your example paying in over 2 years would mean that £50k would be saved that would have been subject to higher rate tax, paying in one year would mean only £25k would have been. 

Albermarle

Even if you paid in £35K both years, you still have to be careful that it is not too much .
The £40K limit includes your contribution + any tax relief paid directly into the pension+ employers contribution .

Dazed_and_C0nfused

janeskips2 said:

Suppose 70k is paid into SIPP in the current year as 40k from the current year allowance and 30k from last year's unused allowance. Suppose income in both the current and previous year was 75k. From a higher rate tax relief point of view, would it have been better to pay in 35k both years rather than the 70k lump sum in year 2 or does it not make a difference?

Ignoring potential investment returns then yes it would have been better split £35k in each year (or any split allowing at least £25k in each year).

That is because you would have received 40% tax relief on £25k in each year rather than just on £25k in the year the payment was really made in.  By paying it all in one tax year you have only received basic rate relief on £45k of the £70k.

That all assumes you aren't Scottish resident for tax purposes.