Thousands of people who put into their pension each year are inadvertently failing to declare pension tax charges, according to HM Revenue & Customs (HMRC). This can result in an unexpected and costly tax liability.
Your annual allowance is the maximum you can save in your pension pots, in a tax year (6 April – 5 April) before you are required to pay any tax.
You will only pay tax if you exceed the annual allowance which, under the current personal tax freeze, will remain at £40,000 until 2026.
For the highest earners, an annual £40,000 allowance could reduce to £10,000 annually.
The rate at which you pay Income Tax will determine the tax charges you pay, should you exceed the respective limits.
However, if you are already drawing your pension flexibly then you need to consider the ‘Money Purchase Annual Allowance’. This allowance is yet lower still, at £4,000.
The important point here is that even where your pension scheme is paying any tax that you owe, you must declare the extra pension savings.
Due to the fact that pension schemes are only required to notify you when you have exceeded the £40,000 limit, many pension savers are simply unaware that they have breached, or are dangerously close to breaching, the limit applying to them.
This is often the case where the savers limit is somewhere between £10,000 and £40,000, as per the tapered scale.
Understanding how the scale operates, is the first step towards ensuring you don’t inadvertently exceed your allowance.
For every £2 your adjusted income goes over £240,000, you will lose £1 of your annual allowance. The £10,000 limit will apply to those with adjustable income at £300,000, whilst anyone earning above that will see their allowance gradually tapered from £10,000 to £4,000.
It is also worth bearing in mind that the annual allowance applies to all of your private pensions (if you have more than one). This includes:
- The total amount paid into a defined contribution scheme in a tax year, by you or anyone else (i.e. 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 may be able to carry forward any unused allowance from the previous three tax years.
How can George Hay help?
If your income is high enough that your pensions annual allowance would be tapered, it may be worth speaking to your accountant or adviser to ascertain whether there are any tax charges to declare.
To discuss your pension or other tax allowances and your plans for utilising these in 2021/22, contact us or fill in our online enquiry form.
Link: Annual Pension Allowance
