Thousands of savers may face an unexpected tax bill and late payment charges because they have unwittingly contributed too much to their pension schemes, HM Revenue & Customs is warning. In its latest newsletter for pension scheme administrators, the tax authority said it knew some savers had not reported that they had breached the annual allowance for pension contributions and asked schemes to remind members to declare such breaches on their self-assessment tax returns.
In principle, the system is simple, with most people entitled to make up to £40,000 of contributions into private pension plans tax-free. Contributions above this cap then give rise to a tax bill at the saver's marginal rate of tax, typically 40% or 45%.
But in practice it's easy to go over the allowance without realising it. The cap applies across all the pension schemes to which you contribute. That can catch out people saving both at work and with a private plan. The allowance also includes contributions made by an employer on your behalf, or any other third party, so you need to add these to your total.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The tapered annual allowance causes additional problems. Higher earners get a reduced annual allowance; it comes down by £1 for every £2 earned above £150,000 and falls to £10,000 for those on annual incomes of £210,000 or more. Some savers have not factored this in.
Another problem is that while it's straightforward to work out what you and your employer have paid into a defined-contribution scheme, the calculation is more complicated for defined-benefit schemes. Here, it's the annual rise in the value of your pension scheme benefits that counts towards the annual allowance, though the formula for assessing this is tricky.
If you're a member of a pension scheme at work, it will tell you if it knows for sure that you have breached the annual allowance. But pension scheme managers don't have access to the full detail of your finances. They won't know about other schemes you're contributing to. They won't necessarily realise you're affected by the tapered annual allowance. That your scheme hasn't issued you with an annual allowance warning therefore doesn't mean you're in the clear.
It's vital that you check your position carefully before completing your self-assessment tax return. If you're in a defined benefit scheme, ask for an annual allowance statement so you can see exactly how much of it you've used up.
In other types of scheme, make sure you're taking employers' contributions into account when calculating your position. And if you think you may be affected by the tapered annual allowance, check what your exact allowance is.
-
Half of UK homeowners will need to tap housing wealth to pay for retirementUnlocking property wealth could inject £21 billion each year into UK economy by 2040, according to new research
-
When will M&S take online orders again?Shoppers have not been able to place orders on the M&S website for more than two weeks, following a cyberattack. Meanwhile, the retailer’s share price has plummeted by 15%. When will things get back to normal?
