Thousands of savers are failing to report annual allowance breaches on their tax returns which leaves them at risk of missing out on tax relief or facing high tax bills, according to Royal London.
Last year HM Revenue & Customs said it was aware some people had not reported breaching the annual allowance, which is currently £40,000.
It warned that people who have used scheme pays, whereby their pension scheme pays the tax charge from their pension, must still declare this charge on their tax return.
Savers who fail to do this are at risk of receiving a large tax bill as anything above the annual allowance is charged at the individual’s income tax rate which could be 40 or 45 per cent.
A freedom of information request by Royal London has shown that in 2016-17, the latest year for which figures are available, 1,004 individuals failed to report the annual allowance tax charge on their tax return and declare that their pension scheme had paid this charge.
Steve Webb, former pensions minister and director of policy at Royal London, said as the number of people affected by scheme pays has grown rapidly since 2016-17, it was likely thousands of people were now failing to report this information.
He explained misreporting on tax returns could arise due to many savers not knowing what their own annual allowance was.
The standard annual allowance is £40,000 per year, but the situation could be different for higher earners who are affected by the money purchase annual allowance, the tapered allowance or have carried forward unused allowances from previous years.
People may also be confused about the amount of pension contributions to include on their tax return.
This needs to cover contributions into defined contribution pensions, including those made by employer and employee as well as any growth in value of defined benefit pension rights – this is calculated as the growth in annual pension entitlement, net of inflation, multiplied by 16.
The latest data from HMRC (September 26) showed 26,550 people reported pension contributions exceeding the annual allowance to the tune of £812m in their self-assessment tax return in 2017-18 , up from £578m in 2016-17, and amounting to an average of £30,584 per person.
Sir Steve said: “Filling in your tax return can be challenging enough, but the complexity of the rules around pension tax relief for higher earners is a particular nightmare.
“The good news is that some higher earners can claim additional tax relief provided that they put the right information on their tax return. But others need to make sure they report contributions in excess of their annual allowance and pay the tax due now.
“However, the complexity of the tax relief system means that this can often be a real challenge, even for taxpayers who are doing their best to be honest and open about their tax affairs.”
Sir Steve warned that by filling in pension tax information incorrectly, many savers were at risk of missing out on tax relief.
— to www.ftadviser.com