Unused Annual Allowances...

[Mogul]

I moved back to the UK in 17-18 after many years abroad and started a (higher rate paying) job. Several months later in Apr-18, I joined the auto-enrolment company pension scheme and paid-in 1-3% during 18-19. (i.e. My membership of this scheme was valid from the beginning of 18-19).

In 19-20, I have woken-up and started using salary sacrifice. I’m now interested in putting some spare savings into a UK pension wrapper and have taken note of the £40k annual allowance with the possibility to carry forward any unused amount…

[I’ll assume that 17-18 will be a lost cause for me as my membership of my employers’ scheme didn’t start until Apr-18.]

For 18-19, I should have a substantial unused allowance and for 19-20, I will have some excess allowance after my salary sacrifice has gone in.

How do they keep track of what you have put in? Does it all come out in the wash when you go through self-assessment? I haven’t been selected for SA so far but presumably I could/should now take the initiative?

My objective will be making full use of the max. £80k allowance for 18-19 and 19-20 (at least).

In terms of how much tax relief should be anticipated…

For 19-20, if I make sure that there’s at least £40k paid-in (via salary sacrifice with the balance paid into a SIPP) I should end up paying very little income tax for 19-20. However, if I am able to put another £35k+ into my SIPP (using-up my unused 18-19 allowance, will I just get the 20% automatic tax relief on that, or will they look back at the higher rate tax that I paid in 18-19 and refund that?

Does the tax refund then come back to me via my tax code leaving me with some extra take home pay from which I might decide to fund further contributions into either my employer’s scheme or my SIPP?

[Stay in Bed Instead]

You only get tax relief in the year of payment, even if using carry forward.

Tax relief is only available against net relevant earnings in the tax year. So if your earnings are £10,000 for example, then you contribute £8,000 and HMRC will credit the pension arrangement with £2,000.

[Mogul]

So the max tax relief that will be available will be the tax that i would otherwise be liable for in the current year?

I.e. 100% relief = nil tax paid.

What if I pay more into my SIPP, presumably the 20% is automatically added by the SIPP provider (ie £8 paid in will look like £10 after the ‘tax relief’ has been added) but are you suggesting that this could lead to a tax charge for me if I appear to have had more than 100% relief?

Sounds like a reason to hold off and keep some back to make more efficient use of my 20-21 allowance etc.

Cheers

[Stay in Bed Instead]

You can contribute up to your relevant earnings and receive the tax credit on it all even though you didn't pay tax on it in the first place.

Its a quirk of the system which you could benefit from.

[Mogul]

Thanks. I'll keep looking into this. Still curious to know how they track how much use one has made of the annual allowances as most of the usual sources refer to the carry forward and the potential to make contributions of up to £160k (current year plus up to three previous years).