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Four pension tax tips for your self-assessment return

Find out what you need to declare if you save into a pension

Four pension tax tips for your self-assessment return

If you save into a pension, you should check if you need to fill out a tax return this January to ensure you get tax relief and avoid a hefty tax bill later on.

Taxpayers are not only required to declare income from sources such as self-employment and letting out property, but also pension contributions in certain situations.

With the 31 January self-assessment deadline just days away, many high earners could miss out on extra pension tax relief or fail to report information about breaching the annual allowance.

Here, Which? explains what pension savers need to know about getting their self-assessment tax return right.

1. Claim higher-rate relief on pension contributions

The government likes to give you a bonus on any money you pay into a pension pot, and this comes in the form of pension tax relief.

This means that some of the money you would have paid tax on goes into your pension, rather than to HMRC.

The level of tax relief depends on what rate of income tax you pay. In England, Wales and Northern Ireland, this means that basic-rate taxpayers get 20% pension tax relief; higher-rate taxpayers get 40% and those who pay additional-rate tax get 45% pension tax relief. In Scotland, the pension tax relief follows the Scottish income tax bands.

You’ll need to check your pension scheme to see which method it uses for tax relief, as you may need to do some extra work to get the full tax relief you’re entitled to.

There are two main ways to claim:

  • Pension tax relief from net pay: pension contributions are deducted from your salary before income tax, and your pension scheme automatically claims back tax relief at your highest rate of income tax
  • Pension tax relief at source: pension contributions are paid after you’ve paid income tax. Your pension scheme will send a request to HMRC, which will pay 20% tax relief into your pension. Higher and additional-rate taxpayers will need to submit a self-assessment tax return to receive the extra due to them to make the total tax relief up to 40% (41% in Scotland) and 45% (46% in Scotland).
  • Find out more: tax relief on pension contributions explained

2. Declare contributions that exceed the annual allowance 

The pensions annual allowance is the amount you can pay into your pension in a single tax year and still claim tax relief. For most people, it’s set at 100% of income or £40,000 – whichever is lower.

The annual allowance has reduced dramatically over the last few years. In 2010-11 it stood at £255,000 but it was cut to £50,000 in 2011-12 before dropping to £40,000 in 2014-15.

In cases where pension contributions have exceeded the allowance, not only will you not get tax relief on the extra payments, but an annual allowance charge will apply.

The charge is normally added to the rest of your taxable income to work out your overall tax liability.

You’ll need to fill out a self-assessment tax return to detail how much of your pension contributions exceed the annual allowance and work out how much is due.

A Freedom of Information (FOI) request by Royal London revealed in the 2016-17 tax year (the most recent year figures are available for), 1,004 individuals failed to report the annual allowance tax charge to HMRC on their tax return.


Annual allowance charge: an example

Sue has a ‘net income’ – her annual income less personal allowances – of £140,000.

Her total pension contribution for the year is £20,000 over the £40,000 annual allowance. This puts her total income for these purposes at £160,000.

  • Sue’s total income exceeds higher-rate limit (£150,000) by £10,000, so this is subject to 45% tax = £4,500.
  • £10,000 of excess pension savings which fall within the band between basic and higher rate limits (£37,500 to £150,000) and is taxable at 40% = £4,000.
  • Sue’s annual allowance tax charge is therefore £4,500 + £4,000 = £8,500.

Figures from the government show that the amount reported by taxpayers as being paid in excess of the annual allowance in 2017-18 was £812m, compared with £95m in 2012-13, an increase of more than eightfold in five years.

3. Check your annual allowance for 2018-19

You could be at greater risk of a tax charge because your annual allowance differs from the norm.

If you’ve already begun to draw your pension (even small amounts) this will reduce your annual allowance to £4,000.

Similarly, if you earn £150,000 or more in any given tax year, this will begin to ‘taper’ your annual allowance.

This applies to your ‘adjusted income’, which is made up of your salary, dividends, rental income, savings interest and any other income you receive.

You lose £1 of the annual allowance for every £2 of adjusted income, which means your allowance could reduce down to as little as £10,000.

Many are also unsure what unused allowance they can ‘carry forward’ from previous tax years. The use of ‘carry forward’ enables people to put more money into their pension without breaching the annual limit.

4. Check if your contributions are under ‘scheme pays’

  • Another reason why people may not mention excess pension contributions in their tax return is that their pension scheme has a feature called ‘scheme pays’.
  • This means that the scheme will automatically pay any tax charge on contributions above the annual allowance.
  • However, even with this feature, taxpayers still need to disclose the excess on their self-assessment tax return, or face being penalised.
  • Royal London claims the number of people affected by ‘scheme pays’ has grown rapidly since 2016-17, so it is likely that thousands of people are now failing to report this information.
  • The FOI from HMRC says that this is a case of ‘under-reporting, not under-payment’, but taxpayers are expected to give complete information on their tax return.

File your tax 2018-19 return with Which?

For a jargon-free, easy-to-use approach to filing your self-assessment tax return, you could try the Which? tax calculator.

You can use it to tot up your tax bill, get tips on making savings and then submit your return directly to HMRC.

Click here to get started.

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