Carry forward

esthomizzy

Hi All

I’m doing R06 next week and while revising I’m trying to figure out the following.

When using carry forward you are limited to earnings in the current year (or 40k) I presume this is earnings in the current year applied to each carry forward year separately not a cumulative total for all the carried forward years as this would not make much sense but I can’t see it clarified for certain anywhere.

Thanks if anyone can help (and good luck with your own exams).

Esthomizzy

richallum

Hi @esthomizzy

Tax relief and annual allowance are separate things.

The maximum contribution the client can get tax relief on this year is 100% of relevant earnings. It's only the current year's earnings that apply.

An annual allowance  tax charge will apply if the contribution exceeds £40,000 unless there is unused allowance to be carried forward from the previous 3 years. The unused allowance is not related to their earnings in previous years.

A very simple example (Ignoring transitional year rules):

if income had been £1,000 in each of the 3 previous years, no pension contributions paid (but they met the definition of being a member of a scheme) and income this year is £150,000*, they could pay in £150,000 and the whole lot qualifies for tax relief and there would be no annual allowance  tax.

IMO the best tool for this is here.

*deliberately below the taper threshold

arongunningham

Titbit: If an employer pays the contribution - you can use the same carry forward calculations but not be limited by 100% relevant earnings. Small business owners, for example, can/do benefit from this.

Jona

Yep the Pru calculator is my go to as well.

esthomizzy

Thanks everyone