Unused annual allowance - I'm confused

gelato_cat

I am super confused about how much of my unused annual allowance from 2019 / 2020 and 2020 / 2021 I can use.

Here's a summary of my situation:

Tax year 2019 / 2020: didn't pay anything into pension, earned less than £3600 (was freelance).  Was and am a member of an old pension from a previous employer and a CSPS scheme.

Tax year 2020 / 2021: didn't pay anything into pension, earned less than £3600 (was freelance).  Was and am a member of an old pension from a previous employer and a CSPS scheme.

Tax year 2021 / 2022: paid approx £5000 into pension including employer contributions and basic tax relief, earned more than £40000 (was employed by a company).  The company opened and paid into a NEST for me.

Tax year 2022 / 2023: paid approx £8000 into NEST pension including employer contributions and basic tax relief, earned more than £40000 (was still employed by the same company).  Realised that I could pay more in, so I opened a Vanguard pension and deposited approx £67000 in there, including the basic tax relief which brought me up to £40000 for the unused TY 2021 / 2022 allowance and £40000 for TY 2022 / 23.

I am now freelance again.  My income for TY 2023 / 2024 will be around £38000.

My questions are:

1)  I originally paid £80000 into my pension in 2022 / 2023 to fully use the allowance for that year and to carry forward all the unused allowance for 2021 / 2022.  However, I now realise I should have started with carrying forward 2019 / 2020 and 2020 / 2021 and paid in £3600 including basic tax relief for each of those years.  At the time, I was still learning about pensions and I had forgotten about my freelance income.

Can I now behave as if that's what I actually intended to do, and therefore I have used all of 2019 / 2020, 2020 / 2021 and 2021 / 2022, and I have £7200 of unused 2022 / 2023 allowance?

2)  Does my income for this year dictate how much of the previous years' allowance I can use?  Ie am I limited to carrying forward the amount which matches this year's income?  So if this year's income is £15000, I can only carry forward a total of £15000 from all the past three years?

3)  If I want to carry forward £7200 of last year's allowance, and I want to contribute as much as allowed for this year, is my income for this year enough to be eligible for this?

Any contributions I make will be from a mixture of my income and my savings (I have enough savings to cover whatever the answers to the above questions are).

Thank you in advance for any light you can shed.

QrizB

Suzey said:

Tax year 2022 / 2023: paid approx £8000 into NEST pension including employer contributions and basic tax relief, earned more than £40000 (was still employed by the same company).  Realised that I could pay more in, so I opened a Vanguard pension and deposited approx £67000 in there, including the basic tax relief which brought me up to £40000 for the unused TY 2021 / 2022 allowance and £40000 for TY 2022 / 23.

Did you earn at least £75000 in 22/23?

Suzey said:

Can I now behave as if that's what I actually intended to do, and therefore I have used all of 2019 / 2020, 2020 / 2021 and 2021 / 2022, and I have £7200 of unused 2022 / 2023 allowance?

You paid in £75k in 22/23. The 22/23 allowance was £40k. What makes you think you've got any left?

Suzey said:

2)  Does my income for this year dictate how much of the previous years' allowance I can use?  Ie am I limited to carrying forward the amount which matches this year's income?  So if this year's income is £15000, I can only carry forward a total of £15000 from all the past three years?

If you earn £15000 this year, you can't carry forward any allowance from any year. You can only use £15000 of this year's allowance.

Per your other question, if your relevant earnings for this year are £38k, you can use £38k of this year's allowance. You still can't carry anything forward.

gelato_cat

QrizB said:

Suzey said:

Tax year 2022 / 2023: paid approx £8000 into NEST pension including employer contributions and basic tax relief, earned more than £40000 (was still employed by the same company).  Realised that I could pay more in, so I opened a Vanguard pension and deposited approx £67000 in there, including the basic tax relief which brought me up to £40000 for the unused TY 2021 / 2022 allowance and £40000 for TY 2022 / 23.

Did you earn at least £75000 in 22/23?

Yes.

QrizB said:

Suzey said:

Can I now behave as if that's what I actually intended to do, and therefore I have used all of 2019 / 2020, 2020 / 2021 and 2021 / 2022, and I have £7200 of unused 2022 / 2023 allowance?

You paid in £75k in 22/23. The 22/23 allowance was £40k. What makes you think you've got any left?

Because I didn't use the 2019 / 2020 or 2020 / 2021 allowances of £3600 per year.

The money I paid in in 2022 / 2023 was to use all the remainder of the £40000 2022 / 2023 allowance and the carried forward 2021 / 2022 unused allowance.

QrizB said:

Suzey said:

2)  Does my income for this year dictate how much of the previous years' allowance I can use?  Ie am I limited to carrying forward the amount which matches this year's income?  So if this year's income is £15000, I can only carry forward a total of £15000 from all the past three years?

If you earn £15000 this year, you can't carry forward any allowance from any year. You can only use £15000 of this year's allowance.

How come?

QrizB said:

Per your other question, if your relevant earnings for this year are £38k, you can use £38k of this year's allowance. You still can't carry anything forward.

Why not?

I did mention upfront that I'm confused, so I appreciate patient replies.  What's obvious to you isn't necessarily obvious to me.

Dazed_and_C0nfused

Why do you think £3,600 is relevant for carry forward of unused annual allowance purposes?

If £75k or £80k was contributed in 2022-23 (it isn't clear which amount) then why do you think you have any annual allowance available to carry forward from 2022-23 🤔

gelato_cat

Dazed_and_C0nfused said:

Why do you think £3,600 is relevant for carry forward of unused annual allowance purposes?

If £75k or £80k was contributed in 2022-23 (it isn't clear which amount) then why do you think you have any annual allowance available to carry forward from 2022-23 🤔

Because I didn't pay anything in at all in 2019 / 2020 or 2020 / 2021.  So I didn't use the £3600 allowances for either of those two years.

Therefore, because I paid in £80k in 2022 / 2023, some of that is carry forward from previous years.  Originally, I meant it to carry forward for 2021 / 2022 and the full allowance for 2022 / 2023, but now I realise I could have carried forward from two years earlier.

It sounds like the confusion has arisen because we have a different understanding of what I was / am allowed to carry forward from 2019 / 2020 onwards.

My understanding is that my annual allowances were:

2019 / 2020: £3600 (not used)
2020 / 2021: £3600 (not used)
2021 / 2022: £40000 (paid in following year)
2022 / 2023: £40000 (paid in same year)

QrizB

Let's start at the beginning.

Each year you receive an annual allowance. Each year you can make gross pension contributions, not to exceed your relevant earnings, up to that allowance. If your relevant earnings exceed your annual allowance, you are allowed to carry forward unused annual allowance from previous years, starting three years earlier.

People without relevant earnings can still contribute £3600.

19/20: your annual allowance was £40k (assuming you haven't done anything to affect it). Your relevant earnings were less than £3600. You made no contributions.

20/21: your annual allowance was £40k. Your relevant earnings were less than £3600.. You made no contributions.

21/22: your annual allowance was £40k. Your relevant earnings were more than £40k. You made £5k contributions.

22/23: your annual allowance was £40k. Your relevant earnings were at least £75k. You made £75k contributions. This will have used all of your allowance for 22/23 and £35k of your carried forward allowance from 19/20.

23/24: your annual allowance is £60k. Your relevant earnings are £38k. You can contribute £38k using your 23/24 allowance. You can't carry anything forward because you haven't used all of the 23/24 allowance.

Does that make sense to you?

Dazed_and_C0nfused

Suzey said:

Dazed_and_C0nfused said:

Why do you think £3,600 is relevant for carry forward of unused annual allowance purposes?

If £75k or £80k was contributed in 2022-23 (it isn't clear which amount) then why do you think you have any annual allowance available to carry forward from 2022-23 🤔

Because I didn't pay anything in at all in 2019 / 2020 or 2020 / 2021.  So I didn't use the £3600 allowances for either of those two years.

Therefore, because I paid in £80k in 2022 / 2023, some of that is carry forward from previous years.  Originally, I meant it to carry forward for 2021 / 2022 and the full allowance for 2022 / 2023, but now I realise I could have carried forward from two years earlier.

It sounds like the confusion has arisen because we have a different understanding of what I was / am allowed to carry forward from 2019 / 2020 onwards.

My understanding is that my annual allowances were:

2019 / 2020: £3600 (not used)
2020 / 2021: £3600 (not used)
2021 / 2022: £40000 (paid in following year)
2022 / 2023: £40000 (paid in same year)

You seem to be getting confused between the annual allowance and amount you could have contributed and received pension tax relief.

Carry forward of unused annual allowance simply allows you to contribute more in a later tax year. 

Marcon

Suzey said:

QrizB said:

Suzey said:

2)  Does my income for this year dictate how much of the previous years' allowance I can use?  Ie am I limited to carrying forward the amount which matches this year's income?  So if this year's income is £15000, I can only carry forward a total of £15000 from all the past three years?

If you earn £15000 this year, you can't carry forward any allowance from any year. You can only use £15000 of this year's allowance.

How come?

QrizB said:

Per your other question, if your relevant earnings for this year are £38k, you can use £38k of this year's allowance. You still can't carry anything forward.

Why not?

I did mention upfront that I'm confused, so I appreciate patient replies.  What's obvious to you isn't necessarily obvious to me.

The point which is commonly overlooked, and repeatedly catches people out, is that you can't contribute more to a pension scheme (and get tax relief on contributions) than you actually earn in the tax year when you are trying to make use of carry forward. If you have relevant earnings of £38K for this tax year, that's the most you can contribute.

Have a look at https://www.hl.co.uk/pensions/contributions/carry-forward-rule which gives some worked examples and might help. Also possibly helpful are https://www.ajbell.co.uk/sites/default/files/useful-forms/AJBYI_SIPP_carry_forward_guide.pdf and https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/carry-forward

Hopefully one or other of the links I've given will help the penny to drop!

jamesd

If you make £38k of contributions in this year you:

1. don't carry forward anything from any previous year because this year's allowance is used first and covers it all
2. and will be able to carry forward the unused part of this year's annual allowance in future years

gelato_cat

QrizB said:

Let's start at the beginning.

Each year you receive an annual allowance. Each year you can make gross pension contributions, not to exceed your relevant earnings, up to that allowance.of.your relevant earnings exceed your annual allowance, you are allowed to carry forward unused annual allowance from previous years, starting three years earlier.

People without relevant earnings can still contribute £3600.

19/20: your annual allowance was £40k (assuming you haven't done anything to affect it). Your relevant earnings were less than £3600. You made no contributions.

20/21: your annual allowance was £40k. Your relevant earnings were less than £3600.. You made no contributions.

21/22: your annual allowance was £40k. Your relevant earnings were more than £40k. You made £5k contributions.

22/23: your annual allowance was £40k. Your relevant earnings were at least £75k. You made £75k contributions. This will have used all of your allowance for 22/23 and £35k of your carried forward allowance from 19/20.

23/24: your annual allowance is £60k. Your relevant earnings are £38k. You can contribute £38k using your 23/24 allowance. You can't carry anything forward because you haven't used all of the 23/24 allowance.

Does that make sense to you?

Yes.  Thank you.

gelato_cat

Marcon said:

Suzey said:

QrizB said:

Suzey said:

2)  Does my income for this year dictate how much of the previous years' allowance I can use?  Ie am I limited to carrying forward the amount which matches this year's income?  So if this year's income is £15000, I can only carry forward a total of £15000 from all the past three years?

If you earn £15000 this year, you can't carry forward any allowance from any year. You can only use £15000 of this year's allowance.

How come?

QrizB said:

Per your other question, if your relevant earnings for this year are £38k, you can use £38k of this year's allowance. You still can't carry anything forward.

Why not?

I did mention upfront that I'm confused, so I appreciate patient replies.  What's obvious to you isn't necessarily obvious to me.

The point which is commonly overlooked, and repeatedly catches people out, is that you can't contribute more to a pension scheme (and get tax relief on contributions) than you actually earn in the tax year when you are trying to make use of carry forward. If you have relevant earnings of £38K for this tax year, that's the most you can contribute.

Have a look at https://www.hl.co.uk/pensions/contributions/carry-forward-rule which gives some worked examples and might help. Also possibly helpful are https://www.ajbell.co.uk/sites/default/files/useful-forms/AJBYI_SIPP_carry_forward_guide.pdf and https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/carry-forward

Hopefully one or other of the links I've given will help the penny to drop!

Thanks for the links, yes, that was one of the parts that confused me!