Carry Forward Pension Payments Can Only Pay In What You Earn
Published / Last Updated on 21/08/2020
If you earn £zero, the maximum you and your employer can pay into a pension scheme is £3,600 pa gross (including tax relief).
However, if you have salary then the pension annual allowance is the lower of your salary and £40,000pa.
This is the maximum that both you and your employer combined can pay into pensions in a tax year.
E.g. Salary £30,000
- The maximum pension contribution allowed is £30,000 in the current tax year.
E.g. Salary £40,000
- The maximum pension contribution allowed is £40,000 in the current tax year.
E.g. Salary £50,000
- The maximum pension contribution allowed is £40,000 in the current tax year.
- You still have the potential to pay in another £10,000 of potential contributions using ‘carry forward’ of unused relief for previous tax years.
Carry Forward of Unused Pension Tax Relief
if your pension allowance over the previous 3 years was £40,000pa and you have only paid in £10,000 pa for each year whilst earning £50,000pa, you have unused relief for each of the last 3 years of £30,000 i.e. a total of £90,000 unused relief.
Capped at Earnings
You cannot pay into a pension scheme and claim tax relief on what you have not earned. E.g. if you earn £40,000pa and you have a windfall and wanted to invest £100,000 in pensions using this years £40,000 allowance and carry forward of the last 3 years unused allowances you cannot. The maximum you can pay into a pension each year is what you have earned in the current tax year.
E.g. Salary £50,000
- The maximum pension contribution allowed is £40,000 in the current tax year.
- You still have the potential to pay in another £10,000 of potential using ‘carry forward’ of unused relief for previous tax years. You must fill up the oldest year first and once the end of the tax year is reached, that year will drop off to the most recent last 3 years. Use it or lose it.
E.g. Salary £100,000
- The maximum pension contribution allowed is £40,000 in the current tax year.
- You still have the potential to pay in another £60,000 of potential using ‘carry forward’ of unused relief for previous tax years so if you had a windfall inheritance or lottery win, you could pay in another £60,000 in carry forward of unused contributions with tax relief.
What if I pay in too much?
This will need to either a) be dealt by your pension company for tax relief to be paid back to HMRC or b) you will need to notify HMRC of the excess payment and they will look to you to repay overclaimed tax relief.
Note for the all of the above: All figures are gross and a combination of both yours and any employer contributions.
