The tax man is about to crack down on pension savers who have failed to report that they have breached the annual allowance.
HM Revenue & Customs has fired a warning shot to retirement savers to bring their records up to date when filing their self-assessment tax returns by January 31, 2020.
“We know that scheme members are forgetting to declare details of their annual allowance charge on their self-assessment returns,” says HMRC’s latest pension schemes newsletter.
“We’d ask scheme administrators to remind those members who have exceeded their annual allowance for 2018 to 2019 and who do not have sufficient unused annual allowance to carry forward to cover the excess, that they must declare this on their self-assessment tax return, even if your scheme is paying the tax charge.”
The annual allowance for most pension savers is £40,000 a year and refers to the maximum amount that can be paid into a scheme with tax relief in a single year.
Hefty fines and penalties
The allowance is £4,000 for savers who have already drawn on their pension pot and tapers from £40,000 to £10,000 for those earning more than £150,000 a year.
The allowance is higher if savers bring forward any unused annual allowance from the previous three years.
Sir Steve Webb, former pensions minister and director of policy at Royal London warned pension savers who have breached the limit but not declared the overpayments on their self-assessment returns could face hefty fines and penalties.
“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,” he said.
How a tax bill is triggered
“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.”
Pension schemes only notify savers if they have breached the £40,000 annual allowance limit.
If the saver falls under the tapered annual allowance and their yearly allowance works out between £40,000 and £10,000, the scheme may not be aware of this and may fail to warn them.
The saver would not know to notify HMRC, which could trigger a tax bill.