HMRC has recently commented that it is aware that some pension charges are not being reported on self-assessment tax returns as they should be. Broadly, subject to the ability to access unutilised carried forward annual allowances, where an individual contributes more than their annual allowance into their pension scheme in a tax year, a tax charge will arise.
The standard annual allowance is £40,000. However, this is reduced once ‘adjusted income’ reaches £150,000 with the full taper of £30,000 (so reducing the annual allowance to a minimum of £10,000) applying once adjusted income is £210,000. This is a relatively straightforward example of how our current pension legislation is complex to the point where well-meaning taxpayers are potentially not paying the tax they are due to pay.
Where contributions over £40,000 are made, the pension scheme is required to remind the member that this needs to be declared on their tax return. However, those taxpayers with a lower annual allowance limit will not be notified in this way. As a result, these are the individuals that HMRC thinks may be forgetting to report the charge. Whether individuals are forgetting to report or simply do not understand the complex rules is up for debate. However, if they're not paying their tax now, this could cause much larger charges, including interest and penalties, in the future.
Some individuals may not normally be required to submit annual tax returns, but even those that are registered to do so may not be alerted to the issue. The HMRC self-assessment software does ask the question, ‘Are you liable to pension savings tax charges or have you received payments from overseas pension schemes?’. However, even when you click for more information, the explanation offered by HMRC only refers to the £40,000 limit and so individuals may still not be aware they have tax to pay.
There have been multiple recent articles covering the state of the UK pension tax rules for example, on their interaction with the NHS pension scheme. HMRC’s renewed interest in unreported annual allowance charges is just a further example highlighting a trap caused by the complexity of these rules.