Many people believe only the self-employed need to fill in a self-assessment tax return, but this is not the case. Higher rate taxpayers could boost their retirement prospects by simply completing a tax return.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, explained why it may be important for some Britons to file a self-assessment tax return.
She said: “Self-assessment tax returns are not just for the mega-wealthy and self-employed. While your employer may take care of paying your income tax there are still instances where you need to fill in a tax return or risk falling foul of hidden pension pitfalls.
“Doing this means you don’t miss out on vital benefits and also makes sure any tax charges you may incur are dealt with in a timely manner.
“Higher rate taxpayers should consider filing a return as you risk missing out on tax relief on your pension contributions and in some cases National Insurance credits that count towards your state pension.
“Claiming these things can have a huge impact on how much you end up with in retirement.”
HMRC will not inform people if it thinks they need to fill in a tax return, so it may be worth getting in contact with them to let them know.
Ms Morrissey also pointed out that people who have breached their annual allowance for pension savings must declare this on their return.
She said: “If you have breached your annual allowance you will need to let HMRC know as a tax charge has been incurred.
“Most people can contribute up to £40,000 a year to their pension without breaching the allowance but if you are a high earner or have already accessed your pension then your annual allowance will be lower.
“If you have already taken income from your pension you will trigger the money purchase annual allowance which means your annual allowance is slashed to £4,000.
“If you have an adjusted income of more than £240,000 and a threshold income of more than £200,000 you will fall foul of the tapered annual allowance which can also reduce your annual allowance to as low as £4,000.”
Pension providers will send their customers a statement if they go over the annual allowance.
Those who have several pensions may need to ask all their providers for a statement so they can make sure they have not breached the allowance.
Ms Morrissey added: “Either you or your pension provider must pay the tax charge. Fill in the ‘Pension savings tax charges’ section on your tax return to tell HMRC about the charge.”
Britons must also declare if they have exceeded their lifetime allowance.
“The current lifetime allowance is £1,073,100. Anything more than this is subject to a tax charge,” Ms Morrissey said.
“This is usually paid by the scheme administrator from the pension pot rather than directly from the individual.”
She also urged people not to rule out claiming Child Benefit even if they are a high earner, as it could prove useful in building entitlement to the state pension.
Ms Morrissey explained: “If you earn over £50,000 and claim child benefit you will be liable for the High-Income Child Benefit tax charge which would need to be paid through self-assessment.
“The charges increase gradually depending on how much you earn and for those earning £60,000 it equals the total amount of the Child Benefit.
“This led to many people choosing not to claim Child Benefit because they had to repay it through their tax return but by not claiming Child Benefit you will miss out on National Insurance credits that count towards your state pension.
“You also have the option to sign up for Child Benefit but opt not to receive it, so you don’t have to pay the charge.”