Pension - Carry forward

curtis122

I work temporary roles throughout the year so my income is very up and down each year. This year I have opened a SIPP and before that I've only ever had workplace pensions and more so over the last 10 yeas just the default enroll pensions. Start of the tax year I did a Bed & SIPP for 4 companies I had invested shares in to move them into a more favourable tax account.  

I understand the basics of the yearly allowance and tax relief paid being on 100% your earnings etc 

I'm a bit worried that given the amount of shares I moved over and the DD I've setup to make regular payments into my SIPP, that based on my earnings I may have go over my tax relief allowance by the time I get to the end of the FY, so I was reading on the internet what happens and found out you get charged income tax on anything over. I also read you can 'Carry forward' for the last 3 years of any unused allowance. 

I looked on the government website also and it mentions this and states that you do not need to let HMRC know so I take by this that as you don't need to do anything on your tax return?

I know I would be under my in my previous years but I am struggling to find any clear advice on how to 'Carry Forward' any unused allowance. Does it happen automatically? I'm assuming it doesn't as HMRC never seem to do much thats automatic where it means you as the tax payer saves money, you normally have to claim.for it somehow.

How do you 'Carry forward' any unused allowance form the last 3 years to use against the previous year?

Albermarle

There is often confusion about carry forward.
The issues are explained well in this recent thread .

Maximum pension contribution for past years — MoneySavingExpert Forum

zagfles

curtis122 said:

I work temporary roles throughout the year so my income is very up and down each year. This year I have opened a SIPP and before that I've only ever had workplace pensions and more so over the last 10 yeas just the default enroll pensions. Start of the tax year I did a Bed & SIPP for 4 companies I had invested shares in to move them into a more favourable tax account.  

I understand the basics of the yearly allowance and tax relief paid being on 100% your earnings etc 

I'm a bit worried that given the amount of shares I moved over and the DD I've setup to make regular payments into my SIPP, that based on my earnings I may have go over my tax relief allowance by the time I get to the end of the FY, so I was reading on the internet what happens and found out you get charged income tax on anything over. I also read you can 'Carry forward' for the last 3 years of any unused allowance. 

I looked on the government website also and it mentions this and states that you do not need to let HMRC know so I take by this that as you don't need to do anything on your tax return?

I know I would be under my in my previous years but I am struggling to find any clear advice on how to 'Carry Forward' any unused allowance. Does it happen automatically? I'm assuming it doesn't as HMRC never seem to do much thats automatic where it means you as the tax payer saves money, you normally have to claim.for it somehow.

How do you 'Carry forward' any unused allowance form the last 3 years to use against the previous year?

This is completely wrong. There is no carry forwards for the tax relief limit. If you accidently exceed the tax relief limit you can claim a refund of the excess after the end of the tax year.

The annual allowance is a different thing. It does have carry forwards, and if you exceed it after using up any carry forwards you have to pay tax, you can't get a refund.

You need to consider them as two separate things, ignore all the simplistic drivel on the internet that attempts to combine them.

curtis122

Ok so I think I have this, the other post really helped.

So to clarify and to confirm I have this, if I paid no pension for the last 2 years and none so far this year, I could pay this year 140k into my pension but if I was earning 20K this year I would only get tax relief on 20k of it but if I was earning 200k this year I would get tax relief on the whole lot. 

So on that basis paying extra into your pension for tax advantages only makes sense on the extra being no more than what you earn to gain the extra from the government. Anything else above that amount then it would be better to use other tax efficient products like your ISA etc.

One thing I would like clarification on Zagfles is, on that thread mentioned you stated "this year's contributions will use this year's AA first. If your total PIA is over £60k including employer/workplace contributions then it'll use up any available carry forwards starting with the oldest available ie 3 years ago (assuming you were in a pension scheme then)."

Who or what is 'it' when you say "it'll use up any available carry forwards"? How does it use up any available carry forwards, does this just happen?

Albermarle

curtis122 said:

Ok so I think I have this, the other post really helped.

So to clarify and to confirm I have this, if I paid no pension for the last 2 years and none so far this year, I could pay this year 140k into my pension but if I was earning 20K this year I would only get tax relief on 20k of it but if I was earning 200k this year I would get tax relief on the whole lot. You understand the concept correctly

So on that basis paying extra into your pension for tax advantages only makes sense on the extra being no more than what you earn to gain the extra from the government. Anything else above that amount then it would be better to use other tax efficient products like your ISA etc.Correct, as pensions are potentially taxable on withdrawal, you need the tax relief on the way in for it to make sense. 
One thing I would like clarification on Zagfles is, on that thread mentioned you stated "this year's contributions will use this year's AA first. If your total PIA is over £60k including employer/workplace contributions then it'll use up any available carry forwards starting with the oldest available ie 3 years ago (assuming you were in a pension scheme then)."

Who or what is 'it' when you say "it'll use up any available carry forwards"? How does it use up any available carry forwards, does this just happen? Yes it does.

Comments in bold.
Just one point, using your example, if you earn £20K , you can only add £20K gross including tax relief.
So you can add £16K then plus  £4K tax relief. 

curtis122

One more question on Zagfles reply where they say "This is completely wrong. There is no carry forwards for the tax relief limit. If you accidently exceed the tax relief limit you can claim a refund of the excess after the end of the tax year.
The annual allowance is a different thing. It does have carry forwards, and if you exceed it after using up any carry forwards you have to pay tax, you can't get a refund."

I understand how you can exceed the annual allowance and then you will get taxed on anything over but how can you exceed the tax relief limit as this is the tax relief the government give you? 

Albermarle

curtis122 said:

One more question on Zagfles reply where they say "This is completely wrong. There is no carry forwards for the tax relief limit. If you accidently exceed the tax relief limit you can claim a refund of the excess after the end of the tax year.
The annual allowance is a different thing. It does have carry forwards, and if you exceed it after using up any carry forwards you have to pay tax, you can't get a refund."

I understand how you can exceed the annual allowance and then you will get taxed on anything over but how can you exceed the tax relief limit as this is the tax relief the government give you? 

The pension provider adds tax relief to all your contributions automatically. It is up to you not to contribute more than you should. If you do then HMRC will catch up with you at a later date.

zagfles

curtis122 said:

Ok so I think I have this, the other post really helped.

So to clarify and to confirm I have this, if I paid no pension for the last 2 years and none so far this year, I could pay this year 140k into my pension but if I was earning 20K this year I would only get tax relief on 20k of it but if I was earning 200k this year I would get tax relief on the whole lot. 

So on that basis paying extra into your pension for tax advantages only makes sense on the extra being no more than what you earn to gain the extra from the government. Anything else above that amount then it would be better to use other tax efficient products like your ISA etc.

One thing I would like clarification on Zagfles is, on that thread mentioned you stated "this year's contributions will use this year's AA first. If your total PIA is over £60k including employer/workplace contributions then it'll use up any available carry forwards starting with the oldest available ie 3 years ago (assuming you were in a pension scheme then)."

Who or what is 'it' when you say "it'll use up any available carry forwards"? How does it use up any available carry forwards, does this just happen?

You should keep records if you exceed the AA and use carry forwards in case HMRC query it. You will probably get a letter if you exceed the AA warning you, but if have available carry forwards you don't need to do anything, you only need to inform HMRC if you've used up all your AA inc carry forwards and need to pay them a charge.

curtis122

"The pension provider adds tax relief to all your contributions automatically. It is up to you not to contribute more than you should. If you do then HMRC will catch up with you at a later date."

I did some further reading on this and on a pension advice site, it says 'they can ask for it back' does that mean they don't always, I take it they would write to you or given i do a tax return, tell me I owe it the following tax year in my final calculation?

Albermarle

I can not comment on how often HMRC might ask for it back, I would have thought normally they would.

Normally the advice on here to people who have overcontributed to a pension, is to contact the pension provider, as they should be able to sort it out. However the longer you leave it I think the more complicated it gets, as the tax relief will have been invested and may have gone up or down in value. 

curtis122

I found an example of this on a pension advice site.

Example:

Rita made contributions of £24,000 to a personal pension. After tax relief was given this came to £30,000. Her relevant earnings for the tax year ended up being £25,000. This meant she had contributed more than her relevant earnings.

As Rita can only receive tax relief on her contributions up to £25,000, the provider refunded the £5,000 that was more than her relevant earnings.

The refund made to Rita though is only £4,000 with £1,000 being re-paid to HMRC as this was the tax relief that had been claimed on the refunded contributions.

There is no tax to pay when receiving a refund of excess contributions lump sum.

Why could the 5k just not stay in there and Rita not just pay back the 1k owed back to HMRC? Surely that's the easiest way especially as money gets invested which mine would be in a SIPP so that would mean shares would have to be sold if no cash held on the account. 

This thread has taught me a lot I never knew or knew properly. When I moved my shares into my Sipp it was to shelter it from the Dividend, Capital gains changes the government are imposing over the next few years, this never even entered my mind and now there is a chance I may be stung.

What does it mean by 'relevant' earnings? That makes it sounds like its not just 'working' earnings.