AN HMRC warning that high earners are failing to report pensions’ growth on their tax returns means thousands of people could face large bills in the future, it has been claimed.
The alert comes from insurer Royal London. It explains that when completing annual tax returns, taxpayers are asked if they have put money into a pension above the ‘annual allowance’.
That is currently £40,000 per year for most people, but as little as £10,000 for those affected by the ‘tapered annual allowance’.
This would include growth in their Defined Benefit pension rights as well as cash paid in to Defined Contribution pots. But this requires taxpayers to understand the rules and put the correct data on their tax return.
Royal London says there “has long been a suspicion” that individuals who do not understand the system have been leaving a blank in answer to this question.
And the insurer says that the taxman has declared that it knows “that scheme members are forgetting to declare details of their annual allowance charge on their self-assessment returns.”
Royal London say that means that people who may have failed to declare large pension inputs on their tax return 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 per cent or 45 per cent.
The taxman has now asked pension schemes to remind members of their duty to put this information on their tax return.
However, 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.
Royal London says that 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. But this could be incorrect and they could later on find themselves with a large tax bill.
Steve Webb, Royal London’s director of policy, says: “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 government needs to radically simplify the tax relief limits, to avoid this sort of situation happening again.”
To discuss any issues this article may have raised please contact me on 01772 430000.