There has long been a suspicion that individuals who do not understand the system have been leaving a blank in answer to this question.
Shockingly, HMRC has confirmed in its monthly ‘pension schemes newsletter’ that they “know that scheme members are forgetting to declare details of their annual allowance charge on their their Self Assessment returns”.
This admission means that potentially thousands of people may have failed to declare large pension inputs on their tax return and could face a large bill when HMRC finally catches up with them. Any pension input above the annual allowance is charged at an individual’s marginal income tax rate which could be 40% or 45%.
HMRC are asking pension schemes to remind members of their duty to put this information on their tax return.
However, pension schemes will only notify members if they have breached the £40,000 annual allowance limit. If an individual is caught in the ‘tapered annual allowance’ and perhaps has an annual allowance between £40,000 and £10,000, the scheme may not be aware of this and may not notify the member. If the member is unaware of the rules around the tapered annual allowance then they may simply enter a ‘zero’ for this question on their tax return. But this could be incorrect and they could later on find themselves with a large tax bill.
Commenting, Steve Webb, Director of Policy at Royal London said: “The shocking saga around the annual allowance for pension tax relief gets worse. We now have HMRC admitting that they know that people are forgetting to put information about their pension tax bills on their annual return. But filling in this tax return question requires individuals to understand the system, especially if they are affected by the tapered annual allowance. Thousands of people could be set to face huge tax bills because they have innocently failed to declare this information on their tax return. HMRC needs to get to the bottom of how many people have failed to declare this information and contact them immediately. And the next government needs to radically simplify the tax relief limits, to avoid this sort of situation happening again”.
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