Here are the pension carry forward rules for pension contributions [source Aviva]
'Quite simply, unused annual allowance from the three previous tax years may be used to increase your client’s available annual allowance for the current tax year.
Taking the earliest carry forward year first (year 1), you reduce the annual allowance by the pension input amounts that applied to that tax year.
If this leaves a positive balance, your client may carry that balance forward to the next tax year (year 2).
Your client will need to perform the same exercise for the middle (year 2), and most recent carry forward year (year 3).
Any remaining balance is the amount which they may carry forward to increase their current annual allowance.
Transitional arrangements applied for tax years 2008/09, 2009/10 and 2010/11 as the annual allowance for those years was above the notional £50,000 level used for carry forward purposes. In these transitional years, any inputs above £50,000 are ignored for carry forward purposes.'
I hope that makes matters a little clearer. Please remember that both employer and employee contributions are aggregated for limitation purposes.
Thank you for the reply.
My problem is that my old employer has not yet made the pension contribution that I requested. I had £110,000 redundancy EG £30,000 tax free and £80,000 pension contribution (my salary was £110,000 and I had sufficient carry over from the previous 3 years to accommodate the £80,000 contribution) but I do not think my previous employers are going to be able to complete this pension contribution before the end of the tax year (5th April 2015).
I therefore have 3 other options if they fail to complete the best option of a pension contribution before 5th April 2015.
1) Get them to pay remaining £80,000 redundancy as ordinary income in this tax year (Before 5th April)
2) Get them to pay remaining £80,000 redundancy as ordinary income in the next tax year.(After 5th April)
3) Let them pay the remaining £80,000 into my pension after 5th April 2015 (but as I have zero income this is a very bad option - I would like to know how bad this option will be to assess the worst possible case)
Thanks in advance for your assistance,
Thank you for your reply.
There is part of your reply that I do not understand
"If paid into a pension fund in the 15/16 tax year when you have no income, unless your brought forward unused pension contribution levels will cover, your flexibility may be squeezed."
It is my understanding that with zero income I cannot make use of bought forward unused pension contributions from previous years since my tax free contribution limit is 100% of my income which is zero therefore only allowing me the zero income limit of £2880 allowance next year. Please confirm if my understanding is correct
I will obviously pressure my old employer to make the pension contribution before 5th April which is clearly the best option for me, but mindful that the worst case for me is that if they miss that date (because they are incompetent) then I will hit the worst case scenario of a pension contribution after 5th April with me on zero income. I may therefore be better asking them to block any pension payment and simply pay it as income since then I can still benefit from pension contributions either before 5th April (In my second private Sipp account) or after 5th April. This gives me less risk exposure if my old employer screws up.
Finally I would like to understand your assessment of the most beneficial of the 3 remaining options to me from my previous reply (reproduced below). I would also like to quantify how bad this worst case scenario might be in terms of tax exposure percentage.
"I therefore have 3 other options if they fail to complete the best option of a pension contribution before 5th April 2015.
3) Let them pay the remaining £80,000 into my pension after 5th April 2015 (but as I have zero income this is a very bad option - I would like to know how bad this option will be to assess the worst possible case)"
Thanks again for your reply this is excellent information.
Just a few last details.
1) How much difference is there between a pre April 5th income payment (where I could funnel the who lot into a SIPP prior to 5th April and get some 40% and some 45% tax relief on the contribution and a post April 5th pension contribution where a higher percentage of the contribution would be at 20% tax relief?
2) What are the horrendous tax consequences of a massive over contribution direct to my pension but in 2015/16 from my ex employer? Is it worse than having to pay standard income tax on all amounts over £2880 assuming I have zero income. (EG first 10,000 tax free, next £32,000 at 20% and all remaining up to £80,000 at 40%
All this excellent assistance is much appreciated.
Thanks in advance,
You don't get tax relief on pension contributions if you are in the 45% tax bracket. Well you do, but it is limited.
Here is the Gov UK's guidance on the matter:
'If you pay 45% Income Tax You can only claim tax relief on the extra 25% in your Self Assessment tax return if you pay Income Tax at the 45% rate.'
If you exceed the allowance then you will be taxed at your highest marginal rate on the amount over the Annual Allowance.
I do hope I have helped. Please be so kind as to rate me before you leave the Just Answer site.
No problem, was well earned.
I hope my company can pay the contribution before 5th April, fingers crossed.
After talking with you my preferred fall back option is to have them pay the remaining £80,000 redundancy as income in the 2015/2016 year and them claim back pension contribution tax relief up to my limits from there.
Thanks again Keith,
Delighted to have been of assistance, Patrick.