Basic-rate tax relief is collected automatically, but if you’re a high earner you will need to claim your extra tax relief through self-assessment.
You can claim tax relief for the last four tax years which can have a huge impact on how much you end up with in retirement. You can also let HMRC know if you’ve breached your annual allowance pension contribution limit using a tax return. These are things worth mentioning:
Pension Contributions
If you’re a UK resident under 75 who makes personal contributions to a pension, you’ll get tax relief on the amount you’ve paid in (provided this doesn’t exceed your earnings).
Your provider will automatically claim 20% basic-rate tax relief for you. But if you’re a higher (40%) or additional-rate (45%) taxpayer, you’ll need to claim the extra 20% and 25%. But to claim it you’ll need to declare your pension contributions on your tax return.
It’s important to include the gross value of your pension contributions. That’s the total of what you’ve paid in (your personal contributions), plus the 20% tax relief from the government.
The additional tax relief will then either be paid to you directly, or HMRC will adjust your tax code or reduce your tax bill.
If you forgot to claim tax relief for a previous year, you can do that up to four years after the end of the tax year you’re claiming for. Tax rates are different in Scotland.
If you earn under £100,000 per year, you’ll benefit from an annual tax-free personal allowance of £12,570 this tax year. But if you earn over £100,000, you’ll lose your tax-free personal allowance at a rate of £1 for every £2 of income over £100,000. This means your personal allowance is zero if you earn £125,140 or more.
Annual Allowance
If you’ve potentially breached your annual allowance in your pension, it’s important to let HMRC know through your tax return. HMRC won’t tell you if it thinks you need to fill in a tax return. It’s best to get in contact with them as soon as possible if you think you’re affected. Doing this makes sure you don’t get hit with any unexpected tax charges.
Most people can contribute up to whichever is higher of their annual earnings or the annual allowance of £40,000 to their pension each year, without incurring a tax charge. However, if you’re a high earner or have already accessed your pension, your annual allowance will be lower.
If you’ve already taken income from your pension, you might have triggered the money purchase annual allowance. This would mean your annual allowance is slashed to £4,000 for contributions to money purchase pensions.
If you have an adjusted income of more than £240,000 and a threshold income of more than £200,000, you’ll fall foul of the tapered annual allowance. This can also reduce your annual allowance to as low as £4,000.
However, you could still benefit from saving more than your annual allowance into your pension while still benefitting from tax relief. You can do this by using any unused allowance from up to three previous tax years. This is known as carry forward. But if you’ve triggered the money purchase annual allowance, you can’t use carry forward to contribute more than £4,000 to money purchase pensions.
If you go over the annual allowance, your pension provider will send you a statement. If you have lots of pensions, you might need to ask them all for a statement so you can make sure you haven’t breached the allowance.
If you have, and you don’t have enough annual allowance from the previous three tax years which you can carry forward, you’ll be subject to a tax charge. Fill in the ‘Pension savings tax charges’ section on your tax return to tell HMRC about the charge.
To ensure you are optimising your personal taxation in 2023, talk to one of our FCA authorised wealth managers by arranging a Discovery Call [Here]
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