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Home Finance Avoiding self-assessment pension problems

Avoiding self-assessment pension problems

by uma


  • Many people believe only the self-employed have to fill in a self-assessment tax return, but this is not the case.
  • If you are a higher rate taxpayer, you should check whether you need to file a self-assessment return.
  • In most cases, basic rate tax relief is collected automatically but if you are a higher rate taxpayer you will need to claim the extra 20% via self-assessment.
  • You can backdate claims for four years.
  • You also need to declare whether you have breached your annual allowance on your pensions.
  • Many high earners choose not to claim Child Benefit because they incur the High-Income Child Benefit tax charge and don’t want to fill out a tax return. However, by not doing this they potentially miss out on vital National Insurance credits that can count towards their state pension.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown:

“Self-assessment tax returns are not just for the self-employed and people with loads of investments – if you are a higher rate taxpayer you may need to fill out one too. Otherwise, you could fall foul of hidden pension pitfalls that could prove costly.

Higher rate taxpayers should consider filing a return as otherwise you risk missing out on tax relief on your pension contributions. Basic rate tax relief is usually collected automatically but higher earners will need to claim their extra tax relief through self-assessment. You can claim unused tax relief for the last four tax years, and it can have a huge impact on how much you end up with in retirement. In addition, if you have potentially breached your annual allowance in your pension, then letting HMRC know via your tax return is hugely important.

HMRC won’t tell you if it thinks you need to fill in a tax return so it’s best to get in contact with them as soon as possible if you think you are affected. Doing this means you don’t miss out on important benefits and also makes sure you don’t get hit with any unexpected tax charges.

Things you need to mention on your tax return

1.You can claim higher rate tax relief on pension contributions

Your provider will automatically claim 20% basic rate tax relief for you. However, if you are a higher (40%) or additional rate taxpayer (45%) you will need to claim the extra 20% and 25% on your tax return to make sure you benefit from it. If you forgot to claim tax relief for a previous year, you can do so up to four years after the end of the tax year you are claiming for. In Scotland, the tax rates are slightly different with higher rate tax at 41% and additional rate at 46%.

2.Have you breached your annual allowance?

If you have breached your annual allowance, you will need to let HMRC know as a tax charge has been incurred. Most people can contribute whichever is highest of annual earnings or up to £40,000 a year to their pension without breaching the allowance. However, if you are a high earner or have already accessed your pension then your annual allowance will be lower.

If you have already taken income from your pension, you will trigger the money purchase annual allowance which means your annual allowance is slashed to £4,000. If you have an adjusted income of more than £240,000 and a threshold income of more than £200,000, you will fall foul of the tapered annual allowance which can also reduce your annual allowance to as low as £4,000.

Your pension provider will send you a statement if you go over the annual allowance. If you have several pensions, you may need to ask them all for a statement so you can make sure you haven’t breached the allowance. Either you or your pension provider must pay the tax charge. Fill in the ‘Pension savings tax charges’ section on your tax return to tell HMRC about the charge.

3.High Income Child Benefit Tax Charge

If you earn over £50,000 and claim child benefit, you will be liable for the High-Income Child Benefit tax charge which would need to be paid through self-assessment. The charges increase gradually depending on how much you earn, and for those earning £60,000 it equals the total amount of the Child Benefit. This led to many people choosing not to claim Child Benefit because they had to repay it through their tax return – but by not claiming Child Benefit you will miss out on National Insurance credits that count towards your state pension. You also have the option to sign up for Child Benefit but opt not to receive it, so you don’t have to pay the charge.