Pension excess contributions charge – missing from the tax return
By Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes)
10 December 2019
HMRC’s November Pension schemes newsletter number 115 announced ‘We know that scheme members are forgetting to declare details of their annual allowance charge on their Self Assessment returns’.
Given that the Annual Allowance charge affected 18,500 individuals in the 2016-17, many thousands of people could be affected.
What is the problem, and what should you do about it?
Problem in a nutshell
Missed entries from the tax return for excess contributions charge could mean significant unexpected tax bills when HMRC discovers the error, and possible penalties for careless or deliberate error.
The tax charge is at the individual’s highest marginal rate, so increasing the impact.
Simplicity made complex
The basic principle is straightforward, if additions to an individual’s pension fund in the tax year exceed £40,000, then there will be a tax charge on the excess contributions.
The picture immediately becomes more complex because the £40,000 limit refers to increases in value of defined benefit schemes (DB), not just new contributions into a scheme during the tax year. Simply totalling payments made into pension schemes during the year is not enough.
With DB schemes, affected individuals may be unaware of liability until they receive a pension savings statement from the scheme administrator. The deadline for issuing these is 6 October after the end of the relevant tax year: leaving just 4 months before the 31 January filing deadline.
High income taper restrictions
Further complications ensue from tapering rules which can restrict the Annual Allowance to £10,000.
This kicks in where adjusted income (using the special s 228ZA, Finance Act 2004 definition) is over £150,000. The annual limit is reduced by £1 for every £2 of income for incomes over £150,000 down to a minimum of £10,000 (at £210,000 income and over).
There is an exemption for individuals whose income, excluding pension contributions, is below £110,000. Taper does not apply in these cases.
Carry forward
Add to this the right to carry forward unused annual allowance for the up to three years, and it can be difficult for an individual to know if they have exceeded the annual limit.
Complications in the NHS
Stopgap measures have been introduced to help lessen the negative impact of excess contribution payments on senior NHS staff. For details, see the article - Government offers temporary pensions tax reprieve to NHS workers in a bid to maintain existing resources level.
What you need to do
How you complete the return will depend on the software you use, but the aim is to mirror entries on the HMRC Additional Information form SA101 2019.
On the HMRC version, the excess annual charge is entered in Box 10 on the Pensions Savings Charges page (Ai 4).
It is necessary to put this information on the return, even if the scheme has paid the tax.
Further reading
The Office of Tax Simplification report Taxation and Life Events Simplifying tax for individuals, published in October 2019 has an in-depth discussion of the issues at paragraphs 3.31-3.78.