HMRC targets pension savers who fail to report annual allowance breach
28 November 2019
Pension savers face being hit with a large tax bill for exceeding their allowance and failing to put the information on their tax return. But this requires individuals to understand a complex system, argues Royal London’s Steve Webb.
In its latest pension schemes newsletter, HM Revenue & Customs said that it was aware that scheme members were forgetting to declare details of their annual allowance charge on their self-assessment returns.
When completing annual tax returns, taxpayers are asked if they have put money into a pension above the ‘annual allowance’ – currently £40,000 per year for most people, but as little as £10,000 for those affected by the ‘tapered annual allowance’. Under the tapered annual allowance rules, £1 of annual allowance is lost for every £2 of income above £150,000 a year.
The figure includes growth in defined benefit pension rights as well as cash paid in to defined contribution pots. However, this requires taxpayers to understand the rules and put the correct data on their tax return.
HM Revenue & Customs’ admission means that potentially thousands of savers may have failed to declare large pension inputs on their tax return and risk a huge tax bill. Any pension input above the annual allowance is charged at the individual’s marginal income tax rate, which could be as much as 40% or 45%.
It has asked pension scheme administrators to remind members who have exceeded their allowance to put this information on their tax return.
Steve Webb, director of policy, Royal London, called it a “shocking saga” and said there had long been a suspicion that individuals who do not understand the system have been leaving a blank in answer to this question.
He said: “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.”
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