Annual allowance charges – reporting and deadlines

31 January was deadline day. Not just for football transfers, but for Self Assessment tax returns too. The proactive amongst us may well have filed months ago (and according to HMRC there were even 2,828 who filed on Christmas Day), but many will be gathering information with a last-minute rush to beat the deadline.

We are often asked how breaches of the pension annual allowance are reported, and how carry forward is dealt with. What information should be provided on the Self Assessment forms and where?

It is the individual’s responsibility to report any annual allowance breach to HMRC, and they usually have sole liability for paying the charge. This contrasts with lifetime allowance breaches, where the scheme administrator will report and pay any charges due in the member’s lifetime.

The scheme administrator is required to send members a pension savings statement when the annual allowance (£40,000) is exceeded within the scheme, or if the money purchase annual allowance (MPAA - £4,000) has been triggered and exceeded. However, not receiving any statement doesn’t mean the member is in the clear. The member might be subject to a lower tapered annual allowance if they are a high earner, or have made contributions to a number of schemes that together breach their available allowance. If the member is unsure of their total accrual in the tax year concerned, they can request a statement from any scheme of which they are a member.

Conversely, receiving a statement doesn’t mean there is a charge to pay. Even if the £40,000 limit is exceeded, carry forward may be available to cover the excess, in which case no charge will arise and there is no need to report it to HMRC.

To carry forward unused annual allowance from an earlier tax year, the full annual allowance in the tax year being reported on must first be used. The individual must also have been a member of a registered pension scheme in the tax year for which they have the unused allowance. For high earners subject to the tapered annual allowance, their unused tapered allowance amount can be carried forward once their current year’s allowance (which may also be tapered) is used. For most savers, annual allowance can be carried forward from the three tax years immediately before the tax year being reported.

Once the MPAA has been triggered, then carry forward is not available in relation to any defined contribution schemes, but can be used if the member is accruing benefits in a defined benefit scheme.

When calculating the input amount, it is important to note that the annual allowance covers all employer contributions, personal contributions and tax relief received in the scheme via relief at source.

HMRC has a calculation tool available here - https://www.tax.service.gov.uk/pension-annual-allowance-calculator

There is a charge to pay – what next?

Importantly, the fact that there is an annual allowance charge makes no difference to how tax relief is claimed. Under the section on paying into registered pension schemes, the amounts should be completed regardless of annual allowance available – claiming tax relief and paying an annual allowance charge are two separate things. As an annual allowance charge attempts to recoup the additional tax relief claimed above the available allowance, it is important to claim that relief first, so you don’t pay a charge for relief that hasn’t been received. And if you enter an amount in this section of more than £40,000, it doesn’t automatically mean that HMRC is going to hit you with an annual allowance charge.

If the annual allowance has been exceeded after considering any carry forward available, then the excess must be reported in the “Pension savings tax charges” section of the additional information section (SA101). It is only the amount reported here that will generate a charge. The total excess is effectively added to income for the year, and Income Tax is charged accordingly.

There is also a box relating to the annual allowance charge paid, or payable, by the pension scheme. If the annual allowance of £40,000 has been exceeded in one scheme, the tax charge is more than £2,000, and notice is given to the scheme by 31 July 2022 in relation to the 2020-21 tax year, then the scheme must pay the charge. The amount the scheme is paying should be entered here, and the scheme administrator will become jointly liable with the member.

In relation to annual allowance charges arising from exceeding the tapered allowance, or MPAA, then liability will always remain with the member. A scheme may agree to pay the charge on a voluntary basis, in which case the information should be entered in the same box as when the ‘compulsory scheme pays’ option is used. However, payment is due by the Self Assessment deadline of 31 January, and schemes only pay the charge on their quarterly return, so for the 2020-21 tax year the deadline has passed, and there would be a risk of late payment charges. The deadline for ensuring there is no penalty for using ‘voluntary scheme pays’ is 30 September.

So, like the football transfer window, a late summer deadline applies too.

This article was previously published by Professional Adviser