Don’t forget your pension contributions on self-assessment form
It’s that time of year when a lot of people are completing their self-assessment tax returns before the cut off on January 31. However, according to HMRC, many people are forgetting to include how much they have contributed to their pension above their annual allowance over the past year. This could be due to not understanding how the annual allowance calculation works. Don’t fall foul of the system this tax year.
Completing the self-assessment form
The HMRC self-assessment tax return form asks people to declare how much they have contributed to their pension above their annual allowance for the last tax year.
This includes growth and cash paid into defined benefit (DB) and defined contribution (DC) pensions.
HMRC have stated that many people are leaving this section black erroneously. Meaning they are not paying the correct amount of tax and could end up with an unexpected bill in the future.
The annual allowance for private pensions
The annual allowance is the maximum amount that you can save into your pension pots in a tax year (6 April to 5 April) before you have to pay tax.
Tax is only payable if you go above the annual allowance. For the tax year 2018/19, this is £40,000.
Your annual allowance applies to all of your private pensions if you have more than one. This includes:
- the total amount paid into a defined contribution scheme in a tax year by you or anyone else (for example, your employer)
- any increase in a defined benefit scheme in a tax year
When your annual allowance is tapered
The reason that some people may not be declaring their pension contributions on their tax return is that they have failed to understand that their annual allowance is tapered due to high income.
Meaning that their annual allowance is below £40,000.
If your adjusted income is over £150,000 your annual allowance in the same tax year will be reduced.
For every £2 your adjusted income goes over £150,000, your annual allowance for that year reduces by £1. The minimum reduced annual allowance you can have is £10,000.
You can find more information on this and how to calculate your allowance if you are a high earner on the gov.uk website here.
Get professional advice
It can be challenging to understand the tax regulations and calculations around pensions. You may wish to run the figures past a finance professional to ensure that you have applied the rules correctly and are making the most of any allowances you are eligible for.
If you found this information useful, you may also want to check out the following:
- Don’t forget to file your self-assessment tax return
- How to prepare for IR35
- Don’t wait until the last minute to use your tax allowances
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