AA/carry forward for low earner

TARDIS

Would appreciate other’s thoughts on this please.

My partner earns £22k a year and pays £2 into a DB pension.

According to their employer’s calculator their estimated pension input amount will be around £23k for 2022/23. The calculator uses 9.4% for CPI. As it’s likely to be higher next month I think this estimation is probably too low.

Previous years’ pension input amounts are less than £10k each year.

1. I think they can pay up to £20k gross into a SIPP - is that right?

2. If so they could breech the £40k annual allowance limit, so can they use carry forward even though they’re a low earner?

 Thanks 

sheslookinhot

I’m sure the figures mentioned don’t stack up.

TARDIS

sheslookinhot said:

I’m sure the figures mentioned don’t stack up.

Which ones?

MX5huggy

TARDIS said:

sheslookinhot said:

I’m sure the figures mentioned don’t stack up.

Which ones?

£2 in to a DB? 

But if they have a lot of years built up in a CARE DB then high CPI will result in a big PIA for AA purpose. 

Yes they can use carry forward but as always they can’t receive tax relief on contributions in excess of their income. 

[Deleted User]

TARDIS said:

Would appreciate other’s thoughts on this please.

My partner earns £22k a year and pays £2 into a DB pension.

According to their employer’s calculator their estimated pension input amount will be around £23k for 2022/23. The calculator uses 9.4% for CPI. As it’s likely to be higher next month I think this estimation is probably too low.

Previous years’ pension input amounts are less than £10k each year.

1. I think they can pay up to £20k gross into a SIPP - is that right?

2. If so they could breech the £40k annual allowance limit, so can they use carry forward even though they’re a low earner?

 Thanks 

I'm sure the experts will be along later but I'm pretty sure the maximum you can put in in any given year is limited by your income. So if you only earn £22k the maximum you can put in is £22k after tax relief. Carryover only applies if you are a high earner so you have maxed out you £40k then use carryover up to your income.

Your point one about "£20k gross into a SIPP" I think you may be confusing with being able to put £20k into an ISA per financial year.

JoeCrystal

MX5huggy said:

£2 in to a DB? 

But if they have a lot of years built up in a CARE DB then high CPI will result in a big PIA for AA purpose. 

Yes they can use carry forward but as always they can’t receive tax relief on contributions in excess of their income. 

Maybe it is a a £2k employee contribution into its DB pension scheme, which makes more sense.

hugheskevi

TARDIS said:

Would appreciate other’s thoughts on this please.

My partner earns £22k a year and pays £2 into a DB pension.

Presumably £2K, rather than £2?

1. I think they can pay up to £20k gross into a SIPP - is that right?

They can pay whatever they like into a SIPP, but will only receive tax relief on up to £20,000 gross contribution (£16,000 net, ie the amount you would send to pension provider, with pension provider claiming 20% - £4,000 - relief automatically)

2. If so they could breech the £40k annual allowance limit, so can they use carry forward even though they’re a low earner?

Yes, in that scenario they would use carry-forward. 

Albermarle

I'm sure the experts will be along later but I'm pretty sure the maximum you can put in in any given year is limited by your income. So if you only earn £22k the maximum you can put in is £22k after tax relief. Carryover only applies if you are a high earner so you have maxed out you £40k then use carryover up to your income

Normally you are right, but the OP also has a DB pensions with a high calculated PIA, so this and adding his full gross salary to a pension would just take them over the AA of £40K

TARDIS

Sorry, yes £2k into the DB scheme.

zagfles

Yes, as above the usual rule of thumb is that someone earning around £20k (after employee DB contributions) doesn't need to worry about the annual allowance, just the tax relief limit (100% of earnings). But in your case paying the full £20k gross into a SIPP plus the PIA on the DB scheme of £23k would exceed the annual allowance, but you'll have loads of carry forwards available if the PIAs in previous years was only £10k or so, so don't worry about it as long as it's a one off. It should be a one off as even if inflation stays high it will be accounted for in the PIA calculation for the DB scheme, but for the first year there may be a lag between the figures the scheme uses and the figure HMRC use to uprate the accrued benefit.

Ignore anything you might read about not being able to use carry forwards if you earn under £40k. It's rubbish. We've even had IFAs here spouting this nonsense, and there are some websites that still say stuff like that.

NedS

zagfles said:

Yes, as above the usual rule of thumb is that someone earning around £20k (after employee DB contributions) doesn't need to worry about the annual allowance, just the tax relief limit (100% of earnings). But in your case paying the full £20k gross into a SIPP plus the PIA on the DB scheme of £23k would exceed the annual allowance, but you'll have loads of carry forwards available if the PIAs in previous years was only £10k or so, so don't worry about it as long as it's a one off. It should be a one off as even if inflation stays high it will be accounted for in the PIA calculation for the DB scheme, but for the first year there may be a lag between the figures the scheme uses and the figure HMRC use to uprate the accrued benefit.

Ignore anything you might read about not being able to use carry forwards if you earn under £40k. It's rubbish. We've even had IFAs here spouting this nonsense, and there are some websites that still say stuff like that.

Agree with all of the above - but just to highlight the above in bold may still be an issue of we were to see 10% inflation this year, then the predictions of 18% next year. It's the difference between the two years (3.1% to ~10% in 2022/23; or hypothetically 10% to 18% in 2023/24) that causes the issue. So next year could be a concern too if we have yet to see the top of the inflation spike. Lots of unknowns at this point, but it doesn't hurt to be aware.