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26 Jan 2021

Four pension saver tax tips for 2019-20 self-assessment returns

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

If you save into a pension, you might need to complete a self-assessment tax return fo 2019-20.

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 self-assessment deadline looming, high earners could miss out on claiming extra pension tax relief they're entitled to or fail to report information about breaching annual allowance limits.

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

1. Claim full tax relief on pension contributions

When you save into a pension, the government will give you a bonus as a way of rewarding you for saving for your future. This is known as pension tax relief.

When you earn tax relief on your pension, some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to HMRC.

Tax relief is paid on your pension contributions at the highest rate of income tax you pay. So:

  • Basic-rate taxpayers get 20% pension tax relief
  • Higher-rate taxpayers can claim 40% pension tax relief
  • Additional-rate taxpayers can claim 45% pension tax relief

In Scotland, the pension tax relief follows the Scottish income tax bands, which are slightly different.

You'll need to check with 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: You won't have to do any extra leg work if your scheme uses the 'net pay' arrangement. Pension contributions are deducted from your salary before income tax is paid on them and your pension scheme automatically claims back tax relief at your highest rate of income tax.

Pension tax relief at source: This applies to all personal pensions and some workplace pensions. If you're paying into a pension through your employer, your employer will take 80% of your pension contribution from your salary. Your pension scheme then sends a request to HMRC, which pays an additional 20% tax relief into your pension. Under this system, higher and additional-rate taxpayers must complete a self-assessment tax return to receive the extra relief 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

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2. Consider your annual allowance

The government puts a limit on the amount of pension contributions you can make on which you can earn tax relief. This is called the pensions annual allowance and is set at 100% of your income or £40,000 - whichever is lower.

Any pension payments you make over the limit will be subject to income tax at the highest rate you pay.

If you exceed the annual allowance in a year, you won't receive tax relief on any contributions you paid that exceed the limit and you will be faced with an annual allowance charge.

The annual allowance charge will be added to the rest of your taxable income for the tax year in question when determining 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.

According to the latest government data, the number of individuals reporting pension contributions exceeding their annual allowance was 26,550 in 2017-18.

3. Check if you've triggered a lower annual allowance

If you've started to draw money from your pension (even a small amount), your annual allowance will fall to £4,000.

This is called the money purchase annual allowance, or MPAA, and applies to people who have taken money from a money purchase, or defined contribution, pension.

Similarly, if you earn £150,000 or more in the 2019-20 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.

You may be able to carry forward your annual allowance from previous tax years, which enables you to put more money into your pension without breaching the annual limit.

4. Find out 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' - a process that allows an individual to pay an annual allowance charge from their pension scheme.

This means the pension scheme pays the annual allowance charge directly to HMRC on the individual's behalf, and the tax charge is taken out of their pension savings.

All registered pension schemes must offer a scheme pays facility. However, an individual must meet all of the following conditions to have the right to use scheme pays on a mandatory basis:

  • Your pension savings in your scheme have exceeded the 'standard' annual allowance for the relevant tax year (the MPAA and tapered annual allowance are ignored for this purpose);
  • Your total annual allowance charge for the relevant tax year has exceeded £2,000;
  • The notice for scheme pays is made within the timescale permitted;
  • You haven't already taken all of your benefits from the scheme.

However, even with this feature, taxpayers still need to disclose the excess on their self-assessment tax return or face being penalised.

File your 2019-20 tax 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.