HM Revenue & Customs (HMRC) has set out guidelines on how to deal with a pension annual allowance tax charge if people breach the limit, as there are a number of ways it can be paid.
This set of clarifications comes after HMRC reported a record £812m ($1bn, €944m) paid by people for breaching the £40,000 annual limit in 2017/18, compared to the £578m paid in the previous financial year.
The number of individuals declaring the breach via their self-assessment tax returns increased as well, reaching 26,550 up from 18,500 in 2015/16.
Communicate with pension scheme
The UK taxman said that pension annual allowance tax charges can be paid either by the pension scheme or the member themself.
If the penalty is over £2,000, a person can tell their pension scheme to pay some or all of the charge, as long as that has been communicated to the scheme by 31 July “of the year after the following tax year”, HMRC said.
If the member doesn’t want the pension scheme to pay the full charge, they have to communicate what percentage of the penalty they would like the scheme to pay.
But once that is decided, they cannot change their mind.
They are only allowed to amend the sum paid by the scheme if the tax charge changes.
Ensure payments went through
If the tax charge is lower than £2,000, the pension scheme does not have to pay the penalty on the member’s behalf, and they have to pay for it themselves, even if the scheme agrees but then it does not settle the charge.
If the deadline is missed, scheme members might be subject to interest charges on top of the tax penalty.
This means that it is up to the individual to check their pension scheme has paid the fine in full by the deadline.
If the pension scheme does not pay a member’s tax charge, it is also required to reduce a person’s benefits.
