How to claim pension carry forward allowance?

[Pistonpants]

I’ve had a pretty big dollop of company share RSUs vest and due to the rocketing share price it has pushed my 21/22 earnings pretty high.

To offset the tax increase I want to pay a large amount into my pension.

At the end of each tax year I usually put a £10-20k lump sum into my pension to keep me below £100K 60% threshold. This year I’ll be looking at around £55K.

I know you have 40K/yr allowance and you can carry forward from previous years but how do you actually go about claiming this - in my case I’ll need to use around 15K from previous years.

I’m hoping all I need to do is put the 55K payment on my tax return and HMRC will automatically look back over the last 3 tax years and see I can carry for 15K from previous years. Is my assumption correct or do I need to somehow claim this allowance?

[B0bman]

Yes, that’s how it works. Provided you do indeed have sufficient unused relief from the last three tax years then you don’t need to do anything further.

[Pistonpants]

B0bman said:

Yes, that’s how it works. Provided you do indeed have sufficient unused relief from the last three tax years then you don’t need to do anything further.

Thanks B0bman

One thing I find confusing is how the £40K pension allowance is calculated.

Ignoring regular employee/employer contributions for a minute....

If I pay in £24K as a lump sum from NET salary, it should get grossed up to £40K in my pension (24/0.6)

What actually happens is the pension company grosses up 20% and I get £30K deposited in my pension account (24/0.8 = £30K), but then when I do my tax return I get the missing 20% back as a refund from HMRC.

So in summary I've got the tax benefit on £40K of gross salary, but only £30K has gone into my pension.

The question is what is the max amount I can pay NET into the pension and be under the £40K allowance, is it £24K NET (£30K into pension) or is it £32K NET (£40K into pension)??

[bmwmike]

Pistonpants said:

B0bman said:

Yes, that’s how it works. Provided you do indeed have sufficient unused relief from the last three tax years then you don’t need to do anything further.

Thanks B0bman

One thing I find confusing is how the £40K pension allowance is calculated.

Ignoring regular employee/employer contributions for a minute....

If I pay in £24K as a lump sum from NET salary, it should get grossed up to £40K in my pension (24/0.6)

What actually happens is the pension company grosses up 20% and I get £30K deposited in my pension account (24/0.8 = £30K), but then when I do my tax return I get the missing 20% back as a refund from HMRC.

So in summary I've got the tax benefit on £40K of gross salary, but only £30K has gone into my pension.

The question is what is the max amount I can pay NET into the pension and be under the £40K allowance, is it £24K NET (£30K into pension) or is it £32K NET (£40K into pension)??

as far as i understand it, and happy to be corrected, is 40k into the pension wrapper per year - however that gets there is pretty much irrelevant.

So in your example, if you put 24k net into a SIPP it gets grossed up to 30k into your SIPP, so that's 30k of your annual allowance used. That you get the 20% back via self assessment is irrelavent to what ends up in your SIPP. It reduces the effective cost of the 30k you ended up with but does not use your annual allowance.

[B0bman]

Yes, the above poster is correct. If you want to pay £40,000 gross in your pension then you need to make a payment of £32,000 net, as you are granted only basic rate tax relief at source.

You can then get the remainder of your tax relief through the self assessment system, and it would ultimately cost you £24,000 in order to enhance your pension pot by the full £40,000 provided you had sufficient income taxable at the higher rate.