Pension tax is a challenge for high earners to get right, claims a former pensions minister.
Many wealthy taxpayers don’t fully understand the system and end up claiming too little relief or pay too much tax, he argues.
To help, he has come up with three tax tips for high earners with pensions.
The first is high earners must claim tax relief by filing a self-assessment return by January 31 each year to cover contributions made in the 12 months up to the April before the deadline.
Most pension providers and employers automatically claim relief at the basic rate (20%), but higher rate (40%) and additional rate (45%) taxpayers can only reclaim the extra tax boost by filing the return.
Warning for taxpayers
“Someone who pays £80 into a personal pension automatically gets an extra £20 in basic rate relief added to their pension. But if they pay tax at 40% they are entitled to another £20 in tax relief which they will only get if they enter this information on their tax return,” said Webb.
Second, always report pension contributions paid over the annual allowance.
The annual allowance varies –
- The standard annual allowance is £40,000 a year
- Retirement savers who have withdrawn cash from their pot will see their allowance drop to £4,000 a year, while those earning more than £150,000 are covered by tapered relief which reduces the allowance on a sliding scale to £10,000 a year
- Carry forward – bringing an unused allowance forward from an earlier tax year – can also increase the allowed annual allowance
Lastly, the former minister also cautions that thousands of retirement savers leaving their employers to report contributions they have made on their behalf may be missing out on extra tax relief.
Tax rules are a nightmare
“Filling in your tax return can be challenging enough, but the complexity of the rules around pension tax relief for higher earners is a particular nightmare,” he says.
“ The good news is that some higher earners can claim additional tax relief provided that they put the right information on their tax return. But others need to make sure they report contributions in excess of their annual allowance and pay the tax due now.
“ However, the complexity of the tax relief system means that this can often be a real challenge, even for taxpayers who are doing their best to be honest and open about their tax affairs.”