Pension tax threat faced by thousands

Thousands of retirement savers risk shock tax bills for “innocently” failing to declare pension tax charges on their self-assessment forms, finance experts warned.

The warning came after HM Revenue & Customs conceded this week it was aware some pension scheme members were “forgetting” to declare details of their annual allowance charges on their tax returns.

When completing an annual tax return, individuals are asked to declare if they have exceeded their annual pension saving limits, currently £40,000 for most people or as low as £10,000 for the very highest earners subjected to the “tapered” annual allowance.

When savings fall foul of annual limits, savers are liable for tax charges payable at the rate they pay income tax. 

In a newsletter published this week, HMRC asked pension scheme administrators to “remind” members who had exceeded their annual limits for 2018-19 that they must declare this on their annual tax return, even if their pension scheme was paying any tax charge owed.

However, the admission from HMRC that some people were “forgetting” to declare details of their tax charges has prompted concerns that savers were not doing so because they did not understand the system.

Currently, schemes are only required to notify members of breaches of the £40,000 annual allowance limit, leaving savers who have a reduced “tapered” annual allowance potentially unaware of the risks they face.

“If an individual is caught in the ‘tapered annual allowance’ and perhaps has an annual allowance between £40,000 and £10,000, the scheme may not be aware of this and may not notify the member,” said Sir Steve Webb, policy director with Royal London and a former pensions minister.

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“If the member is unaware of the rules around the tapered annual allowance then they may simply enter a ‘zero’ for this question on their tax return. But this could be incorrect and they could later on find themselves with a large tax bill.”

Thousands of higher earners, mostly in the public sector, have fallen foul of the tapered annual allowance since it was introduced in 2016. The Conservatives have pledged to review the taper for the NHS, after thousands of doctors were landed with unexpected pension tax bills, after inadvertently exceeding their annual limit by doing extra shifts.

Sir Steve said HMRC needed to go further and take steps to contact people who unwittingly failed to declare pension tax charges.

HMRC said it had noticed that where a scheme reported and paid a member’s annual allowance tax charge, there was not always a correlating entry on the member’s self-assessment tax return, hence the newsletter this week. HMRC declined to comment further. 



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