How to implement pension carry forward

valuepack

Hi all

An inheritance that I'm due is going through probate at the moment and I intend to put a big chunk into my pension using the carry forward rule.

I'm aware that I need to max out the current year before going back to the year before.

If the money comes through before 1st April, I could easily calculate how much to pay into the current year because because I only have a couple of months worth of contributions before then.

It's likely that I won't get the money until the new tax year, though.

How do I max out the year when it has just begun? My employer pays in, so the contributions will be ongoing.

If I can't max out the year, I can't carry forward to previous years.

What am I missing?

Dazed_and_C0nfused

For a start "going back" isn't a thing.

You can only ever get tax relief for the tax year the contribution is paid in.

Do you definitely have sufficient earnings to enable you to use carry forward?  In your other thread you said this.  Which suggests carry forward might not work like you maybe think it does?

I'm a basic rate tax payer.

You have the whole tax year to contribute in, you don't have to make the contributions as soon as the tax year starts.  But if you want to do that you need to have a good idea of your expected earnings and might have to sort out excess contributions if things change during the year.

Marcon

valuepack said:

Hi all

An inheritance that I'm due is going through probate at the moment and I intend to put a big chunk into my pension using the carry forward rule.

I'm aware that I need to max out the current year before going back to the year before.

If the money comes through before 1st April, I could easily calculate how much to pay into the current year because because I only have a couple of months worth of contributions before then.

It's likely that I won't get the money until the new tax year, though.

How do I max out the year when it has just begun? My employer pays in, so the contributions will be ongoing.

If I can't max out the year, I can't carry forward to previous years.

What am I missing?

High enough earnings to use carry forward!

In your thread last month you said you earn under £60K, so that rules out the use of carry forward.

valuepack

Dazed_and_C0nfused said:

For a start "going back" isn't a thing.

You can only ever tax relief for the tax year the contribution is paid in.

Do you definitely have sufficient earnings to enable you to use carry forward?  In your other thread you said this.  Which suggests carry forward might not work like you maybe think it does?

I'm a basic rate tax payer.

You have the whole tax year to contribute in, you don't have to make the contributions as soon as the tax year starts.  But if you want to do that you need to have a good idea of your expected earnings and might have to sort out excess contributions if things change during the year.

I'm a basic rate tax payer.

Please can you spell out what you think I'm missing about carrying forward rather than just alluding to it?

p00hsticks

valuepack said:

Dazed_and_C0nfused said:

For a start "going back" isn't a thing.

You can only ever tax relief for the tax year the contribution is paid in.

Do you definitely have sufficient earnings to enable you to use carry forward?  In your other thread you said this.  Which suggests carry forward might not work like you maybe think it does?

I'm a basic rate tax payer.

You have the whole tax year to contribute in, you don't have to make the contributions as soon as the tax year starts.  But if you want to do that you need to have a good idea of your expected earnings and might have to sort out excess contributions if things change during the year.

I'm a basic rate tax payer.

Please can you spell out what you think I'm missing about carrying forward rather than just alluding to it?

As I understand it....

The standard annual pension allowance is £60k
You can only put in as much as you earn each year. 
If you are a basic rate tax payer you aren't earning £60k so can't put in £60k, so aren't going to use all your annual allowance so can't carry forward....  

Marcon

valuepack said:

Dazed_and_C0nfused said:

For a start "going back" isn't a thing.

You can only ever tax relief for the tax year the contribution is paid in.

Do you definitely have sufficient earnings to enable you to use carry forward?  In your other thread you said this.  Which suggests carry forward might not work like you maybe think it does?

I'm a basic rate tax payer.

You have the whole tax year to contribute in, you don't have to make the contributions as soon as the tax year starts.  But if you want to do that you need to have a good idea of your expected earnings and might have to sort out excess contributions if things change during the year.

I'm a basic rate tax payer.

Please can you spell out what you think I'm missing about carrying forward rather than just alluding to it?

The gross amount you contribute in any one tax year cannot exceed the gross amount of earnings you have in that tax year, including any you make using carry forward. You earn under £60K so have no scope to use carry forward, because you don't earn enough to use it.

doodling

Hi,

There are several limits involved:

1. There is no limit on employer contributions but they are subject to the annual allowance.

2. Personal contributions in any tax year are limited to your earnings for that tax year and are also subject to the annual allowance.

3. The annual allowance limits you to £60000 plus any amount available through carry forward in any tax year.

Note that these are not actually hard limits - you are permitted to exceed them but in that case you don't get any tax relief and need to inform HMRC via your tax return so that they can ensure you pay the correct tax.  Paying money into a pension without the tax relief doesn't make sense for most people - something like an ISA is a better choice for that.

From what I can tell, in your case:
A. These are personal contributions so point 1 is irrelevant.
B. As these are personal contributions then you are limited to paying in no more than your earnings.
C. As your earnings are less than £60k then carry forward is irrelevent.

If you want to get as much into your pension as possible from a lump sum then the usual strategy is to increase your contributions through work to the maximum your employer will allow (whilst living off the lump sum).  Then, near the end of the tax year, when you have a better idea of what you have earned / will earn, you make an additional lump sum payment to make your contribution up to the maximum.

Dazed_and_C0nfused

valuepack said:

Dazed_and_C0nfused said:

For a start "going back" isn't a thing.

You can only ever tax relief for the tax year the contribution is paid in.

Do you definitely have sufficient earnings to enable you to use carry forward?  In your other thread you said this.  Which suggests carry forward might not work like you maybe think it does?

I'm a basic rate tax payer.

You have the whole tax year to contribute in, you don't have to make the contributions as soon as the tax year starts.  But if you want to do that you need to have a good idea of your expected earnings and might have to sort out excess contributions if things change during the year.

I'm a basic rate tax payer.

Please can you spell out what you think I'm missing about carrying forward rather than just alluding to it?

To use carry forward you need to have first used the current year's annual allowance.  Which is £60k.

Will you be doing that?

valuepack

Thanks everyone for your responses. 

I just want to give an example to illustrate what I want to do, and I'd really appreciate it if people could point out where I'm going wrong, if indeed I am. 

I earn about 35k.

I estimate that I'll receive about 100k inheritance.

Let's say during year 24-25, which is nearly over, I've paid 10k into my workplace pension, including employer contributions.

By the time I reach end of year I can have paid in a further 25k of my lump sum into my workplace pension. This would mean my pension contributions would equal my earnings.

Then, having maxed out my pension contributions for 24-25, I can use the carry forward rule and revisit year 23 -24. 

Let's say I earned 34k that year and paid in 9k in total pension contributions.

Using carry forward, I can then pay 25k of my lump sum into that year's pension contributions. 

Again, I've maxed out my pension contributions for that year but have not gone over my earnings amount.

Then, rinse and repeat for the two previous years.

This way, using the numbers in my example, I could pump my inheritance into my pension and get tax relief as I've not exceeded my annual earnings for any one year.

Is this not a good vehicle to get my inheritance invested?

HappyHarry

No.

This tax year you can only contribute to a pension an amount up to your earnings - I.e. £35,000.

You cannot contribute anymore even if you have not used previous years allowances.

If you earned, say, £135,000 this year, then you could contribute £60,000 for this year then carry forward up to another £75,000 from previous years' allowances.

Dazed_and_C0nfused

valuepack said:

Thanks everyone for your responses. 

I just want to give an example to illustrate what I want to do, and I'd really appreciate it if people could point out where I'm going wrong, if indeed I am. 

I earn about 35k.

I estimate that I'll receive about 100k inheritance.

Let's say during year 24-25, which is nearly over, I've paid 10k into my workplace pension, including employer contributions.

By the time I reach end of year I can have paid in a further 25k of my lump sum into my workplace pension. This would mean my pension contributions would equal my earnings.

Then, having maxed out my pension contributions for 24-25, I can use the carry forward rule and revisit year 23 -24. 

Let's say I earned 34k that year and paid in 9k in total pension contributions.

Using carry forward, I can then pay 25k of my lump sum into that year's pension contributions. 

Again, I've maxed out my pension contributions for that year but have not gone over my earnings amount.

Then, rinse and repeat for the two previous years.

This way, using the numbers in my example, I could pump my inheritance into my pension and get tax relief as I've not exceeded my annual earnings for any one year.

Is this not a good vehicle to get my inheritance invested?

You cannot ever "revisit" a previous tax year when it comes to pension contributions.

As you still haven't used all the 2024-25 annual allowance (£60k) I'm not sure why you think carry forward of unused annual allowance from a previous year is possible?

This might help,

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/carry-forward/