Thousands of people who put money into their pension each year are inadvertently failing to declare pension tax charges, according to HM Revenue & Customs (HMRC).
This can lead to an unexpected and costly tax bill.
Most taxpayers can save up to £40,000 in pension contributions tax-free each tax year, a limit that sets to remain in place until 2026.
Any contributions above this amount are subject to income tax and reporting in your self-assessment tax return.
High earners (with annual incomes over £240,000) could see their pension allowances taper down to as little as £4,000, wiping out the tax benefits for putting money aside for retirement.
The annual allowance tapers away by £1 for every £2 of income over £240,000.
For example, if your income is over £270,000, you would be £30,000 over the threshold and lose £15,000 of the allowance. Therefore, leaving a limit of £25,000 to put into your pension tax-free.
Meanwhile, those with an income over £312,000 will benefit from an annual allowance of just £4,000, which is the lowest level it can fall.
Similarly, people flexibly drawing down their pensions must pay Income Tax on contributions above the £4,000 Money Purchase Annual Allowance.
Pension schemes are only obliged to alert people who exceed the usual £40,000 limit, with many affected individuals unaware of the prospect of a substantial tax bill on everything over and above as little as £4,000.
This has hit the headlines in recent years for its effect on doctors in the NHS. Although fewer should now be affected as the earnings threshold has risen by £90,000 from £150,000.
Your annual allowance applies to all of your private pensions if you have more than one, including:
- The total amount paid into a defined contribution scheme in a tax year by you or anyone else (for example, your employer)
- Any increase in a defined benefit scheme in a tax year
- If you use all of your annual allowance for the current tax year.
You might be able to carry over any annual allowance you did not use from the previous three tax years. If you have any questions about the annual pension allowance and need advice, then contact us.
Link: Annual Pension Allowance
