Saving for a pension? Are you one of thousands facing an unexpected tax bill?
Much as I enjoy reading the Financial Times, I always turn to it with a slight feeling of trepidation. Why? Because I often seem to find articles that make me worry that the taxman wants to clean out my bank account.
Luckily I didn’t find any panic-inducing articles today but one piece did get me thinking about my pension. It’s worth summarising, because it’s quite possible that you need to follow its advice if you want to avoid being hit by an unexpected tax bill.
Check your pension savings limits now!
According to HMRC, thousands of people who put money into their pension each year are inadvertently failing to declare pension tax charges.
In a nutshell, when you are filling in your annual Self Assessment Tax Return, you’re supposed to tell the taxman if you’ve put more in your pension than your yearly pension savings limit. This is £40,000 for most of us but tapers down to only £10,000 for the highest earners. If you exceed your annual limit, you pay tax charges at the rate you pay income tax.
The important point here is this: you need to declare the extra pension savings, even if your pension scheme is paying the tax you owe.
Many pension savers aren’t aware of this, largely because pension schemes are only required to let you know if you go over the £40,000 limit. So, if your limit is somewhere between £10,000 and £40,000, you may be unaware that you’ve exceeded it.
Lots of people have ended up with unexpected bills because of this. Notably, lots of NHS doctors have ended up with demands because they had done extra shifts that pushed them over the limit!
Have you gone over your pensions savings limit?
The key to working out whether or not you’ve gone over your pension savings limit is to understand the tapered scale between the £40k and £10k allowances.
Basically, for every £2 of income over £150,000, you lose £1 of your annual allowance. So, if your income is £170,000, you lose £10,000 of the allowance – meaning it’s capped at £30,000. If you earn £210,000 or more, then the allowance is capped at £10,000.
HMRC has woken up to discrepancies in Self Assessment returns because pension schemes have reported and paid members’ annual allowance tax charges, without those charges being reflected in personal tax returns.
The takeaway piece of advice, therefore, is aimed largely at higher earners. If your income is high enough to take you into the tapered savings limit, check with your accountant that you haven’t failed to declare annual allowance tax charges. If you’d like any help doing this, please get in touch.