Money purchase annual allowance pension warning

HMRC has issued guidance only two weeks before the self assessment deadline to help taxpayers work out when the pensions money purchase annual allowance (MPAA) applies and whether tax is payable on pension savings

The guidance is useful to individuals who have ‘flexibly accessed’ pensions to work out their correct tax position. Flexible access occurs where money is withdrawn from either a defined contribution pension, or a qualifying overseas pension that has had UK tax relief.

If individuals flexibly access their pension, then they will need to work out what the alternative annual allowance is and whether they have gone above other allowances.

To work out the correct position individuals will need to know the total pension savings for each of the pension schemes in the tax year they are checking.

Pension savings are:

  • for defined benefit pensions - the increase in value of your benefits in a tax year (if the value decreased your pension savings will be nil)
  • for defined contribution pensions - the total contributions, including any tax relief, made by you or a third party (like your employer) in a tax year

Taxpayers have gone above the money purchase annual allowance if they have paid over £4,000 into all of their defined contribution pensions from either:

  • the day after they first flexibly accessed their pension to the end of the tax year; or
  • the whole of the tax year if they flexibly accessed in a previous tax year.

If they have not gone above the money purchase annual allowance, they will pay tax on all pension savings that go above your annual allowance.

If individuals have gone over the money purchase annual allowance, they must work out:

  • What the alternative annual allowance is;
  • If they have gone above the alternative annual allowance;
  • The alternative chargeable amount; and
  • The default chargeable amount.

The alternative annual allowance applies to all pension savings in the:

  • defined benefit pension; and
  • defined contribution pension before flexibly accessed.

The alternative annual allowance is £36,000, but it may be different if your adjusted income is over £150,000 as it may be reduced. To work this out individuals must first work out their reduced (tapered) annual allowance and then deduct £4,000.

The way individuals work out if they have gone above your alternative annual allowance is different depending on when they first flexibly accessed their pension.

The amount of pension savings individuals will pay tax on is the higher of the alternative chargeable amount and the default chargeable amount.

To work out the alternative chargeable amount, individuals should:

  • Start with the amount they have gone above the money purchase annual allowance by.
  • Add the amount they have gone above their alternative annual allowance by.
  • Carry forward any unused annual allowances from previous tax years.

To work out the default chargeable amount, individuals should:

  • Start with the total amount of pension savings in all of their pensions for the year they are checking.
  • Deduct their annual allowance.
  • Carry forward any unused annual allowances from previous tax years.

Anyone who has gone over their allowance must declare so on a self assessment tax return and pay the amount of tax due.

HMRC guidance - Work out your allowances if you’ve flexibly accessed your pension is here. 

Report by Amy Austin

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