Thousands of people who put money into their pension each year are inadvertently failing to declare pension tax charges, according to HM Revenue & Customs (HMRC).
This can lead to an unexpected and costly tax bill.
Your annual allowance is the maximum you can save in your pension pots in a tax year (6 April to 5 April) before you have to pay tax.
You will only pay tax if you go above the annual allowance, which is due to remain at £40,000 until 2026 under the current personal tax freeze.
This reduces to only £10,000 for the highest earners. If you exceed your annual limit, you pay tax charges at the rate you pay Income Tax.
However, if you are already drawing your pension flexibly then you need to consider the Money Purchase Annual Allowance, which is even lower at £4,000.
The important point is you must declare the extra pension savings, even if your pension scheme is paying the tax you owe.
Many pension savers aren’t aware of this, largely because pension schemes are only required to let you know if you go over the £40,000 limit.
So, if your limit is somewhere between £10,000 and £40,000, you may be unaware that you have exceeded it.
Lots of taxpayers have ended up with unexpected bills. Notably, NHS doctors have ended up with additional tax liabilities because they had done extra shifts that pushed them above the annual allowance.
The key to working out whether or not you’ve gone over your pension savings limit is to understand the tapered scale between the £40,000 and £10,000 allowances.
For every £2 of income over £150,000, you lose £1 of your pension annual allowance. So, if your income is £170,000, you lose £10,000 of the allowance – meaning it is capped at £30,000. If you earn £210,000 or more, then the allowance is capped at £10,000.
If your income is high enough to take you into the tapered savings limit, check with your accountant that you have not failed to declare annual allowance tax charges.
Your annual allowance applies to all of your private pensions if you have more than one.
- The total amount paid into a defined contribution scheme in a tax year by you or anyone else (for example, your employer)
- Any increase in a defined benefit scheme in a tax year
- If you use all of your annual allowance for the current tax year.
You might be able to carry over any annual allowance you did not use from the previous three tax years.
More information >> Annual Pension Allowance
If you want to discuss your pension, get in touch with our wealth management team.