In our regular Q&A series, Croner Taxwise tax advisor Alexandra Fielding considers the tax implications for high earners of exceeding the annual allowance limit of £10,000 on pension contributions
Q. I have several self-assessment clients who may be at risk of exceeding the annual allowance charge, but they have not received any statements from their pension schemes alerting them to the issue. What is the correct process to ensure that the charge is correctly reported on the annual tax return?
A. When we get calls to the advice line about the annual allowance charge, it often emerges that we cannot progress to discuss how the charge is calculated because the caller does not have sufficient information from their client about pension inputs in the year.
The circumstances under which a pension scheme administrator must issue a statement to a scheme member are quite limited: broadly, that will only be where the member’s pension input amount for the tax year exceeds the annual allowance (reg. 14A SI 2006/567 – see HMRC’s Pensions Tax Manual PTM167100).
However, the scheme administrator is looking at one particular pension arrangement in isolation, but the annual allowance charge applies when pension inputs across all registered pension schemes exceeds the available annual allowance.
Since 2016/17 there has been a possibility that the full annual allowance is tapered down to as little as £10,000 if the taxpayer’s income is sufficiently high.
For these reasons, it is perfectly possible that someone’s total pension input amount has exceeded the available annual allowance without triggering an automatic issue of a pension input statement from any of the schemes of which they are a member.
Where someone is contributing a to ‘relief at source’ arrangement (where their contribution is treated as being made net of basic rate tax that is then claimed from HMRC by the scheme) information on those contributions will usually be handed over to the accountant as part of the process of preparing the self-assessment tax return because that will be needed to claim relief from higher rate tax.
The information can then be used to establish the pension input to those schemes as a result of the individual member’s contributions.
However, where the pension scheme is set up differently (for example, NHS superannuation or an employer’s defined benefit scheme) the pension input amount cannot be calculated based on the contributions made by the member into the scheme.
As a matter of good practice, it is worth building into your procedures for gathering information for the return a reminder so that your client puts in a request to the administrator (as per Reg. 14B SI 2006/567 – see PTM167300) for each of their schemes to produce a statement of pension inputs annually. This means
tel: 0844 892 2470 all of the information is available before work on drafting the self-assessment tax return begins, even if the conditions for an automatic issue of the statement have not been triggered.
About the author
Alexandra Fielding is a tax adviser at Croner Taxwise, tel: 0844 892 2470
This article first appeared on Croner Taxwise