With around £8bn of tax relief claimed annually in respect of pension contributions, you would hope that your pension scheme is claiming the correct amount of relief in relation to your pension pot. However, it seems that HMRC has discovered this is not always the case and is on the warpath to reclaim tax relief where it has been overpaid.
Pension provision is an important part of an employer’s relationship with its employees, with many employers providing contributions to pension as part of the overall financial package. With the advent of auto-enrolment in 2012, qualifying employers have been obliged by law to provide a workplace pension scheme. In other words, the number of employees having workplace pensions is rising on an annual basis.
The government provides incentives for individuals to save for their retirement by giving tax relief on pension contributions. For many employees, payment is taken directly from their net earnings and paid to a pension provider. The pension provider claims the tax relief on the contributions it receives, boosting the total pension pot further.
Even better, many employers make arrangements to provide the tax relief upfront via a “salary sacrifice”. Under this approach, the employee contribution is deducted before earnings are taxed, reducing the tax deducted at source. In this case, the pension provider does not need to reclaim the tax as relief has been given through the payroll.
Worryingly, the government and the pensions industry have now woken up to the fact that in many salary sacrifice cases data has been provided to the pension scheme incorrectly, resulting in the pension scheme also claiming tax relief on the contributions. In other words, pension pots have had double tax relief!
Not surprisingly, the government wants this overpaid tax relief back, which is fair enough. If I had inadvertently paid my plumber twice, I would expect him or her to return the amount overpaid, and the concept here is no different.
The problem is what this could mean in practice. In many cases, these overpayments could have been going on for years and it is the pensioner who is going to suffer. The tax repayment will come out of the pension pot, which will shrink by the amount of overclaimed tax. Annual projections of pension income that individuals have used to plan their retirement will turn out to be badly overstated, and existing pensioners could see their income fall. This could get really ugly.
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