Hundreds of taxpayers could face unexpected tax bills for failing to declare pension contributions accurately on their self assessment returns
HMRC’s most recent monthly pension schemes newsletter acknowledges the potential for problems.
The newsletter states: ‘We know that scheme members are forgetting to declare details of their annual allowance charge on their self assessment returns.
‘We would ask scheme administrators to remind those members who have exceeded their annual allowance for 2018 to 2019 and who do not have sufficient unused annual allowance to carry forward to cover the excess, that they must declare this on their self assessment tax return, even if your scheme is paying the tax charge.’
When completing annual tax returns, taxpayers are asked if they have put money into a pension above their annual allowance. This is currently £40,000 per year, but can reduce to as little as £10,000 for those affected by the tapered annual allowance.
Royal London points out that the annual allowance figure includes growth in an individual’s defined benefit pension rights as well as cash paid in to defined contribution pots. The insurer says this requires taxpayers to understand the rules and put the correct data on their tax return, and claims there has long been a suspicion that individuals who do not understand the system have been leaving a blank in answer to this question, which HRMC’s latest newsletter would seem to support.
Royal London says pension schemes will only notify members if they have breached the £40,000 annual allowance limit. 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. 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.
This admission means that potentially thousands of people may have failed to declare large pension inputs on their tax return and could face a large bill when HMRC finally catches up with them. Any pension input above the annual allowance is charged at an individual’s marginal income tax rate which could be 40% or 45%.
Steve Webb, director of policy at Royal London said: ‘The shocking saga around the annual allowance for pension tax relief gets worse.
‘We now have HMRC admitting that they know that people are forgetting to put information about their pension tax bills on their annual return.
‘But filling in this tax return question requires individuals to understand the system, especially if they are affected by the tapered annual allowance. Thousands of people could be set to face huge tax bills because they have innocently failed to declare this information on their tax return.
‘HMRC needs to get to the bottom of how many people have failed to declare this information and contact them immediately. And the next government needs to radically simplify the tax relief limits, to avoid this sort of situation happening again’.
Report by Pat Sweet, Accountancy Daily
published by Croner-i Ltd
If you would like more information on anything in this article, just get in touch on 01388417747 or book an appointment