Missing pensions declarations

Where a taxpayer has paid pension contributions which exceed their annual allowance, they must declare the excess on their tax return to calculate the annual allowance charge, even if the pension scheme is going to pay that charge.

Many taxpayers don’t realise that they have to make this declaration, and HMRC has noted this in its latest pensions scheme newsletter. An over-payment of pension contributions can arise unexpectedly due to the operation of two pensions traps; the money purchase annual allowance (MPAA) and the “restricted” annual allowance.

The MPAA reduces the standard £40,000 annual allowance down to £4,000, where pension benefits have already been accessed, as we outlined in our newsletter on 24 January 2019.

The restricted annual allowance reduces the standard allowance by £1 for every £2 that the taxpayer’s adjusted net income (including pension contributions) exceeds £150,000. It applies even if pension benefits have not been accessed.

The problem for many high earners is they don’t know exactly how much has been added to their pension pot in a particular tax year.

For defined contribution schemes it should be the sum total of employee and employer contributions. In theory it should be possible to calculate this if the contributions are a straight percentage of total pensionable pay, but you need to check exactly what the pension scheme rules say.

For defined benefit (final salary) schemes the amount added to the pension scheme is the product of a complicated formula dependant on the value of the fund, years of pensionable employment, and the level of pensionable pay. In practice the taxpayer needs to get this figure from their pension fund administrator in order to make the correct declaration on their tax return.

However, some pension schemes, particularly the NHS schemes do not provide timely information to the scheme members.

Written by the Tax Advice Network