Unable to use carried forward pension allowance

hugheskevi

Simplicity77 said:

Sorry but I think you are wrong: I got this response from Moneyhelper

to be eligible to do 'carry forward' and go back three years, in the tax year you want to exercise 'carry forward', you have to have earnings from employment or self-employment of £40,000 gross or more; and (ii) you have had to been a member of a pension scheme in the current tax year, and the previous 3 tax years. As you only have a salary of £30k in this current tax year, you cannot do 'carry forward', as you do not meet the condition regarding earnings from employment in the current tax year

Im guessing once I get over £40k this year my carried forward allowance will go into 23/24, but I will be using it up this year so will have no carried forward next year.

Anyway, I lose out for the least three years and felt like I was hit with a stone when I was told this by Moneyhelper. Im sad.

The Moneyhelper response is wrong. Unfortunately, many websites dumb down the content to try to avoid technical language, at the expense of accuracy. In this case Moneyhelper is making the very common error of conflating the two issues which have been explained at length in this and your other thread.

Unfortunately when it comes to pensions, and especially pensions and tax, you have to be extremely careful asking individuals for guidance - it is very common for HMRC officials to give the wrong information, and the same applies to staff at pension administrators and organisations such as Moneyhelper. It helps to think about what the paygrade of the person giving the information is in order to consider how reliable it is. I've spoken with plenty of accountants who do not understand the Annual Allowance system.

Have a read through the relevant section of the HMRC Pension Tax Manual and you will see there isn't a £40,000 restriction to use carry-forward on earnings from employment or self-employment (or to use the correct technical term, earnings that attract tax relief).

It would be helpful if you could calculate your earnings that attract tax relief for 2022/23 and tell us what that is.

No, once you get over £40K earnings this year, your carry forward from previous years becomes available, capped by the amount you earn this year.

This is not accurate. Many long-serving members of final salary schemes earning below £40,000 who get a promotion have a pension input exceeding £40,000 despite earning under £40,000 both before and after promotion, and as you would expect, they can use carry-forward. 

coyrls

hugheskevi said:

No, once you get over £40K earnings this year, your carry forward from previous years becomes available, capped by the amount you earn this year.

This is not accurate. Many long-serving members of final salary schemes earning below £40,000 who get a promotion have a pension input exceeding £40,000 despite earning under £40,000 both before and after promotion, and as you would expect, they can use carry-forward. 

I am sure that is true but it doesn't apply to the OP.

Simplicity77

NedS said:

Simplicity77 said:

coyrls said:

No, once you get over £40K earnings this year, your carry forward from previous years becomes available, capped by the amount you earn this year.

Really? I was trying to think that but thought I was just trying to convince myself unnecessarily.
So my lump sum pushes me over £40k  which triggers the carried forward for the previous 3 years which were below the threshold of £40k. If so then you just made my day with a very big smile.

Why don't you tell us exactly what your gross earnings are going to be for this year tax year, and exactly how much you have contributed in the last 3 tax years, and we will be able to better help you.

I don't know my Gross earnings yet. My phi offer was £50K + £11k (£30k p.a)to date but still waiting for the negotiated amount to be decided and it could be £100k or it could stay at £50k.

Say I got £75k offered and my pay to date was £13k I guess I would gross £88k. 

I contributed just under £10k last 3 years when I was receiving £30k a year. It gives me £80k c/f to use. 

hugheskevi

Simplicity77 said:

I don't know my Gross earnings yet. My phi offer was £50K + £11k (£30k p.a)to date but still waiting for the negotiated amount to be decided and it could be £100k or it could stay at £50k.

Say I got £75k offered and my pay to date was £13k I guess I would gross £88k. 

I contributed just under £10k last 3 years when I was receiving £30k a year. It gives me £80k c/f to use. 

The earnings which attract tax relief include:

• Permanent Health Insurance (PHI) payments paid by the employer whilst you are still in employment

If the payment was £75,000 and it qualifies as earnings that attract tax relief, then along with the assumed £13,000 of earnings in 2022/23 the total earnings which attract tax relief would be £88,000 (as you say).

If you contributed just under £10K (from all sources - your own contributions, employer contributions and tax relief, noting that Defined Benefit schemes are different and use pension input rather than pension contributions) in each of the last 3 years then you have just over £90,000 (£40,000 less just under £10,000 for each of the 3 years) of carry-forward available from last 3 years, in addition to your allowance of £40,000 from 2022/23. You could therefore contribute just over £130,000 into a pension without being subject to the Annual Allowance (assuming neither the Money Purchase Annual Allowance nor the tapered Annual Allowance is relevant, ie, that you have not taken any pension income yet nor had taxable income in excess of £110K in a past year).

Hence the relevant limit you face for tax relief is your amount of earnings which attract tax relief in 2022/23, ie £88,000 from the example above. You can put as much of the £88,000 (including tax relief) into a pension as you like and receive tax relief (you cannot receive tax relief on anything above £88,000, and if using a scheme operating net pay would only get relief up to £75,430). If you have a standard Personal Allowance then the first £37,730 (gross, ie including tax relief) would qualify for higher rate relief. 

Grumpy_chap

hugheskevi said:

It is a common misunderstanding that you need to earn £40K+ to use carry forward. This is not the case. Anyone, regardless of their earnings, is able to carry-forward unused Annual Allowance from the last 3 financial years.

Well, you sort of do.  Assuming qualifying earnings this tax year are sufficient, the Annual Allowance is consumed in the following order:

• £40k current tax year (2022-23)
• Available carry forward from three tax years ago (2019-20)
• Available carry forward from two tax years ago (2020-21)
• Available carry forward from previous tax year (2021-22)

So, if eligible earnings this tax year are exactly £40k or less, the carry forward from 2019-20 cannot be used and will be lost to time.

hugheskevi

Grumpy_chap said:

hugheskevi said:

It is a common misunderstanding that you need to earn £40K+ to use carry forward. This is not the case. Anyone, regardless of their earnings, is able to carry-forward unused Annual Allowance from the last 3 financial years.

Well, you sort of do.  Assuming qualifying earnings this tax year are sufficient, the Annual Allowance is consumed in the following order:

• £40k current tax year (2022-23)
• Available carry forward from three tax years ago (2019-20)
• Available carry forward from two tax years ago (2020-21)
• Available carry forward from previous tax year (2021-22)

So, if eligible earnings this tax year are exactly £40k or less, the carry forward from 2019-20 cannot be used and will be lost to time.

Take the member from your example. Assume they are in a final salary scheme and have a pension input of £50,000 due to a promotion. They use carry-forward from 2019/20 to mitigate/avoid an Annual Allowance charge.