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22 Jan 2022

Four tips for pension savers filing a 2020-21 tax return

Higher-rate taxpayers risk missing out on pension tax relief by not filling out a tax return
A woman filing her self-assessment tax return

It's a common misconception that only the self-employed have to fill in a self-assessment tax return, but there are other situations where you might have to send one.

For example, if your pension contributions exceed the annual allowance you'll need to declare this to HMRC. And higher-rate taxpayers could miss out on pension tax relief if they don't file a tax return.

Although HMRC has waived its late filing charge until 28 February, and its late payment charge until 1 April, it's still worth trying to hit the January 31 deadline to avoid incurring interest on unpaid tax.

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

1. Claim tax relief on pension contributions

As an incentive to save for retirement, you get tax relief when you pay into a pension. This means the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government.

How much tax relief you get depends on how much income tax you pay:

  • Basic-rate taxpayers get 20% pension tax relief (meaning a £100 contribution would only cost £80)
  • Higher-rate taxpayers can claim 40% tax relief (a £100 contribution would only cost £60)
  • Additional-rate taxpayers can claim 45% pension tax relief (a £100 contribution would only cost £55)

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How do I claim pension tax relief?

This depends on the type of pension you are saving into. It's worth checking with your scheme to see what method it uses, as you may need to do some extra work to get the full tax relief you're entitled to.

There are two main methods:

Net pay: Pension contributions are deducted from your salary before income tax is paid on them. Your pension scheme automatically claims back tax relief at your highest rate of income tax. This means you'll get the full tax relief you're entitled to without having to claim it yourself.

Relief at source: This applies to all personal pensions and some workplace pensions. 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. This means higher and additional-rate taxpayers will need to submit a self-assessment tax return to claim the extra tax relief they're entitled to, or contact HMRC directly.

For example, if you earn £60,000 in the 2020-21 tax year and put £15,000 into a private pension, you'd automatically get 20% tax relief at source on the full £15,000.

You can claim an extra 20% tax relief on £10,000 (this is the amount of your income you paid higher rate tax on) through your self-assessment tax return.

2. Take note of your annual allowance

The government puts a limit on the amount of pension contributions you can earn tax relief on. This is called the pensions annual allowance.

It is set at 100% of your income or £40,0000 - whichever is lower.

This means that any pension contributions you make over the limit will be subject to income tax at the highest rate of pay.

However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years.

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.

This charge is added to the rest of your taxable income for the year 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.

According to the latest government data, the number of individuals reporting pension contributions exceeding their annual allowance through self-assessment was 42,35 in 2019-20.

The total value of contributions reported as exceeding the annual allowance was £950m in 2019-20.

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

If you have a high income, you might have a reduced annual allowance. This will be the case if your 'adjusted income' is above £240,000.

'Adjusted income' is made up of your salary, dividends, rental income, savings interest and any other income you receive.

This means that for every £2 of income you have over £240,000, your annual allowance is reduced by £1.

The maximum reduction is £36,000 of your annual allowance. So anyone with an income of £312,000 or more has an annual allowance of £4,000.

You could also have a lower annual allowance if you have already begun to draw your pension. This will reduce your annual allowance 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.

4. Check if your pension scheme will pay tax charges

If your pension contributions have exceeded your annual allowance, you might be able to ask your pension scheme to pay any tax charge on contributions above the annual allowance directly to HMRC. This arrangement is known as 'scheme pays.'

The charge is then taken out of your pension pot, meaning you don't have to fund it by other means.

However, you still need to disclose the annual allowance charge on your tax return or risk being penalised.

All registered pension schemes must offer a scheme pays facility, but you must meet the following criteria to use it.

  • Your pension savings with that scheme are more than the annual allowance of £40,000 (the MPAA and tapered annual allowance are ignored for this purpose)
  • Your tax charge is more than £2,000 for that year
  • You've notified your scheme by the deadline of 31 July in the year following the end of the tax year

There is government guidance on what to fill in your self assessment tax return box here.

Need more self-assessment tips?

If you're filing your first self-assessment tax return or want to refresh your memory, Which? has plenty of helpful information to make the process easier.

See our guide onhow to fill in your tax return, read up on the eight mistakes to avoid and how to cut your 2020-21 tax bill.

File your 2020-21 tax return with Which?

If you haven't yet submitted your 2020-21 tax return, the Which? tax calculator could help.

Our online tool is easy to use, jargon-free and helps you tot up your tax bill. What's more, it will even suggest areas where you might be able to claim expenses that you might have forgotten about.

When you're finished, you can use the tool to submit your tax return directly to HMRC.