What happens if you accidentally pay more into your SIPP than is allowed?

[Saracen]

DH wants to pay the maximum allowable into his pension this year. Being self-employed with a variable income and expenses, he won't know exactly what his net profit for the year was until after the year has ended.

What happens if he pays in, say, £15k and then it turns out that his net profit from self-employment was only £13k?

HMRC would impose a tax charge on the overpayment. Not sure on the actual mechanics of that but there will be a way that they get back the wrongly claimed tax relief.

Avoid making large payments to pension if there may not be the salary to support it. Accountants and financial planners are very busy towards tax year end due to things like this. One way to minimise risk of going over, is to pay in monthly to pension following totalling the income for the month.

Thank you! I just want to be sure he wouldn't be in trouble over it, really.

He hates paperwork and only bothers to do it at tax time. This hasn't caused any problems, because it is always HMRC who owe him money rather than the other way round. He's in the building trade and has tax deducted at source on most of his income. That doesn't take his expenses into account, so he's always overpaying.

Has he been paying into the pension in previous years as you can use unused allowances from 3 previous years if they had sufficient income and had paid into a pension during those periods

I didn't know that! Thanks, that's great. He only opened a pension for the first time in autumn 2022, and didn't put nearly as much into it as he could have in that tax year, because he underestimated what his income was going to be that year.

Sufficient Income is a key thing there, plus having pension scheme(s) open.

In 2023/24 tax year, gross income would need to be over £60,000. What the gross income is would be the maximum gross amount to pension. So if the business provided £100k of gross income, then being able to use Carry Forward is possible. Could not pay £100k into pension, as need to account for tax relief at basic rate. So max to pension if gross income was £100k is £100k x 0.8 = £80,000.

Then there has to have been a pension scheme open in the past years.
The current pension was opened in autumn 2022, so was there anything prior to that open? If not, then 2022/23 tax year pension annual allowance could be available to be used, but not prior years. In 2022/23 tax year, pension annual allowance was £40k, and some of that has been used by contributions made autumn 2022 to 5th April 2023.

If Carry Forward does apply, then use it, and when completing tax return put on the pension contribution details, and in the notes section add that Carry Forward from 2022/23 tax year is being used, or whatever past years are being used. Keep good records should HMRC ever queries it.

Thanks @nannynick , that is very helpful and detailed advice.

@wobytide You can only use your carry forward allowance after you have maxed out the current year’s full allowance, i.e. you would need to contribute more than £60k gross this year. Which means you need to have had earnings of at least that.

Nannynick has tried to explain it in a complex way.