10 January 2023
Every individual is entitled to receive tax relief on pension contributions made within their annual allowance. The annual allowance can be as high as £40,000 but, depending on personal circumstances, the amount available to be accessed for tax relief could be as low as £3,600. If contributions are made in excess of an individual’s annual allowance plus unused annual allowance from the preceding three tax years , a tax charge arises. This should be self-assessed and included on the individual’s tax return.
Pension contributions can exceed the available annual allowance for many reasons – if someone’s income is higher than expected, they may have a restricted annual allowance of less than £40,000.
Alternatively, if they are in a defined benefit scheme (as many NHS professionals are) that is inflation-linked, the pension input amount used as a substitute for contributions may be abnormally high, even without a significant increase in earnings. To recognise that people may not have the funds available to settle any tax charge arising, there is an option for it to be paid by the pension fund itself.
We have recently seen HMRC issue formal legal notices to a number of taxpayers whose pension contributions exceeded their available annual allowance in the 2017/18 tax year. In these cases, tax returns had been completed on the basis that the pension scheme would pay the tax arising, rather than the individual. HMRC officers have asked for various information to ‘assist [them] in tracing this payment’.
This raises a number of issues – taxpayers are required to calculate the tax due as a result of exceeding their available annual allowance and to tick a box within their tax return to say that this tax is ‘paid or payable’ by the pension scheme, whilst also providing HMRC with their pension scheme’s tax reference number. Assuming that the tax returns were filed on time, the normal time period for HMRC to enquire into 2017/18 returns ended almost three years ago, on 31 January 2020 at the latest.
It appears that HMRC is unable to reconcile payments and information it has received from pension schemes with the information received from individual taxpayers.
It has taken HMRC a significant amount of time to identify the issue, but it has now issued formal notices to taxpayers. This raises a question as to why HMRC is unable to obtain this information from pension schemes? More important, however, is the question of whether HMRC is out of time to request payment of this tax from the individuals concerned, thus potentially leaving the exchequer out of pocket.
Any taxpayer receiving a formal HMRC notice regarding their pension contributions should consult with a tax adviser before responding.