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.
Here, Which? explains what pension savers need to know about getting their self-assessment tax return right.
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:
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).
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.
If you've started to draw money from your pension (even a small amount), your annual allowance will fall to £4,000.
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.
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:
However, even with this feature, taxpayers still need to disclose the excess on their self-assessment tax return or face being penalised.
You can use it to tot up your tax bill, get tips on making savings and then submit your return directly to HMRC.