My wife has a SIPP worth about £28K. She has not made any contributions in to her pension for a number of years and is not currently working /earning. Can she carry forward unused annual allowances from these previous years?
Many thanks!
My response:
Yes, it is possible to carry forward unused annual allowances although there are certain rules and caveats. Firstly you have to have been a member of a "registered pension scheme for the years question or a member of an overseas pension scheme and either you or your employer qualified for UK tax relief on pension savings in that scheme"
Assuming that someone meets the above criteria then if they wish to pay more into their pension than the current year's annual allowance and receive tax relief then they can carry forward unused annual allowances from the previous 3 tax years.
However, the allowances are carried over in a strict order (after using the current year's allowance you then use the earliest annual allowance first). The annual allowance for the most recent tax years are
- 2011/12 - £50,000
- 2012/13 - £50,000
- 2013/14 - £50,000
- 2014/15 - £40,000
So lets say that someone was earning £80,000 in 2014/15 and had the following unused annual allowances:
- 2012/13 - £30,000 unused
- 2013/14 - £30,000 unused
It would be possible for the person to pay £80,000 into their pension in 2014/15 while claiming tax relief on the contribution. This is because they can use the 2014/15 allowance of £40,000 and then carry forward the £30,000 unused allowance from 2012/13 and then £10,000 from 2013/14. This will then leave them with £20,000 unused annual allowance for 2013/14 which could potentially be carried forward next year.
It is important to remember that the annual allowance is set to limit the amount of tax relief a person receives on pension contributions. Also that you can only claim tax relief on contributions up to 100% of your relevant earnings (not all earnings are relevant, investment an dividend income are not) or £3,600 which ever is greater.
So in your wife's case, despite her being a member of a pension scheme and assuming she hasn't paid into that pension in the last 3 years she still wouldn't be able to pay more than £2,880 net (equivalent to £3,600 gross) into her SIPP this year and receive tax relief as she has no relevant earnings. In addition, your wife can not use the carry forward rules and get tax relief on her pension contributions, which is the whole point of using the rules. Of course there is nothing stopping her putting more than £3,600 in to her pension this tax year, but she wouldn't get tax relief on the extra contributions so there is little point doing so.
So unfortunately unless your wife has a sudden increase in earnings in this tax year over and above £40,000 then the carry forward of unused annual pension allowances is not available.
Full details of the rules surrounding the carry forward of unused annual pension allowances can be found on the HMRC website. Also as a general aside for others reading this, if you wish to see the potential impact of increasing your pension contributions on your pension fund and possible retirement income then here is a great pension calculator* which I have found useful.
I hope that helps,
Damien Fahy
Website: www.moneytothemasses.com
Twitter: money2themasses
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