Higher earners face huge tax bill for ‘forgetting’ to declare pension details
Taxpayers are asked on their self-assessment form how much they have contributed to their pension above their annual allowance over the past year. This includes growth and cash paid into defined benefit (DB) and defined contribution (DC) pensions.
They must pay tax at their marginal income tax rate, which could be 40% or 45%, on any contributions above their annual allowance.
However, HMRC has confirmed many taxpayers leave the answer to this question blank, meaning potentially thousands of people may have failed to declare large pension inputs and could face a large bill when HMRC catches up with them.
In its monthly newsletter to pension schemes, the tax authority wrote it knows “that scheme members are forgetting to declare details of their annual allowance charge on their self-assessment returns”.
Pension schemes are only obliged to notify members if they have breached the standard £40,000 annual allowance limit.
However, some people have a much lower annual allowance but may not know because the rules are so complicated.
Under the tapered annual allowance rules, £1 of annual allowance is lost for every £2 of income above £150,000 a year.
Once income exceeds £210,000 the annual allowance bottoms out at £10,000.
If the member is unaware of the rules around the tapered annual allowance then they may simply enter a ‘zero’ for the question about pension contributions on their tax return.
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.”
He added: “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.”