Pension annual allowance tax charge must be paid to HMRC when you have exceeded your annual pension allowance in a tax year and you have no brought forward allowances available or the brought forward allowances & current year allowance added together aren’t sufficient to cover the pension contributions made in a tax year.
HMRC does not apply a pension annual allowance tax charge on anyone for going over their annual allowance in a tax year if they:
- – retired and took all their pension pots because of serious ill health
- – died
The pension annual allowance tax charge has come as a shock to a lot of employees who have received a large bonus from their employer which has then resulted in their adjusted income for the tax year exceeding £240,000 up to tax years 2022/23 thereby reducing their pension annual allowance and it’s too late for them to reduce their pension contributions for the tax year that ended on 5th April 2023.
Your excess pension savings can be charged to tax in whole or in part at 45%, 40% or 20% depending on your taxable income and the amount of excess pension savings. For ex: if your adjusted income for the tax year 2022/23 is £300,000 and your tapered annual allowance is £4,000 but you have contributed £20,000 into your pension savings in the tax year then you will need to pay a 45% charge on the £16,000 excess pension savings = £7,200 payable to HMRC for tax year 2022/23.
If you meet certain criteria, your pension scheme must pay this pension annual allowance tax charge for you if you tell them to, this is also known as mandatory scheme pays.
In some cases they may choose to pay the annual pension allowance tax charge for you, even if they do not have to, this is also known as voluntary scheme pays. You will need to check if your scheme will do this.
If your scheme does pay the pension annual allowance tax charge for you, they must reduce your benefits.
You must tell HMRC about the Pension annual allowance tax charge using a Self Assessment tax return by the deadline, even if your pension scheme pays it. If your scheme only pays some of the charges, you must pay the rest directly to HMRC.
If the Pension annual allowance tax charge is more than £2,000
You can tell your pension scheme to pay some or all of your annual allowance tax charge if:
- – your pension savings with that scheme are more than the annual allowance (currently £60,000) for that tax year
- – your tax charge is more than £2,000 for that tax year
- – you’ve told them by the deadline of 31 July of the year after the following tax year
There may be some cases where your scheme does not have to pay all of your tax charges even if it is more than £2,000 and you will need to pay the rest of the amount.
You will need to tell your pension scheme how much you want them to pay for you by the deadline.
If you tell your pension scheme to pay the tax charge, you cannot change your mind. If the tax charge you need to pay changes, you can ask them to change the amount they’re paying.
How to tell your pension scheme to pay the pension annual allowance tax charge
You must tell your pension scheme electronically or in writing and include:
- – your title
- – your full name
- – your address
- – your National Insurance number (or if you do not qualify for one, the reasons why not)
- – the tax year that the charge is for
- – the amount of tax charge that you want the scheme to pay
- – confirmation that you have worked out the tax charge at the correct rate
- – confirmation that you cannot cancel your request
- – confirmation that you know your benefits will be adjusted
- – confirmation that you have personally submitted the request or your signature and the date
If the Pension annual allowance tax charge is £2,000 or less
Your pension scheme can choose to pay all or some of the tax charges, but they do not have to. If your scheme does not pay the tax charge, you must pay it yourself.
If your pension scheme agreed to pay the tax charge but did not, you’ll have to pay it, plus any penalties and interest if you’ve missed the deadline.
You should check that your scheme has paid the charge on time, as you may have to pay interest for late payments.
What you need to check
If your pension scheme pays this tax charge for you, you’ll need to check that they have reduced your benefits.
If your scheme does not reduce your benefits, you’ll have to pay an unauthorised payment charge.
Reporting Pension annual allowance tax charge on your Self Assessment tax return
Use the HS345 pension savings helpsheet to fill in your Self Assessment tax return.
You must make sure that:
- – you complete box 10 if you have a tax charge, even if your scheme pays some or all of it
- – if your pension scheme pays some or all of the tax charge, you put the amount they pay in box 11 on the SA101
- – you ask for your pension scheme’s Pension Scheme Tax Reference (PSTR) and put this in box 12 on the SA101
- – if more than one pension scheme is paying an amount of your tax charge, you fill in the ‘any other information’ box on page TR7 on the SA100
If you’ve told HMRC your scheme will pay some or all of your tax charge, you need to make sure you also tell your scheme.
Whichever type of pension scheme you’re in (for example, a career average scheme), you’ll need to know your pension savings so you can work out both your:
- – threshold income
- – adjusted income
If the pension savings made in the tax year are more than your available annual allowance, you should include the excess amount on your Self Assessment return. Your available annual allowance is your reduced allowance plus any unused allowance from the previous 3 tax years.
This amount is added to your taxable income and you will pay Income Tax on it, at the tax rate that applies to you.
Work out your net income
- -Add up your taxable income for the tax year.
- Deduct any tax reliefs that apply, like payments made to your pension scheme that had tax relief but were paid before the relief was given (because your pension scheme was not set up for automatic relief or someone else paid into your pension).
Your taxable income could include:
- – earnings from employment
- – earnings from self-employment or partnerships
- – most pensions income (State, occupational and personal pensions)
- – interest on most savings
- – income from shares (dividend income)
- – rental income
- – income received by an individual from a trust
If you do not know how to calculate your net income, a financial adviser specialising in tax and pensions should be able to help you.
Check if you have a Pension annual allowance tax charge on your pension savings
You cannot use this calculator if you are a member of a hybrid scheme.
You can use this calculator if you are a member of a:
- – UK Registered pension scheme
- – Qualifying overseas pension scheme
Before you start
You need to know:
- – what types of pension schemes you have or had
- – how much has been saved in your pension schemes for the dates you want to check
- – if and when you have flexibly accessed your pension savings
- – if your threshold income is more than £110,000
- – if your adjusted income is more than £150,000
You also need to know:
- – if your threshold income is more than £200,000 between 6 April 2020 and 5 April 2023
- – if your adjusted income is more than £240,000 between 6 April 2020 and 5 April 2023
How can MCL Accountants help?
Contact MCL Accountants on 01702 593 029 if you would like to know more about the pension annual allowance tax charge or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.
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Ishan provides financial management, taxation and transactional advice to business entities of all sizes. His expert areas include statutory compliance, business taxation, personal tax & transactional processing and systems. Industry sectors include professional services, retail, hospitality and entertaining & media and advertising services.