Making tax-smart decisions in good time for tax-year end can make a real difference to the pension pot people have when they retire. Some pension savers could be missing out on pension tax relief by not filling out a tax return.
Britons have until 11.59pm on Tuesday January 31, 2023, to send HMRC an online tax return for the 2021/2022 tax year, which ended on April 5, 2022.
Using the full range of tax breaks available on ISAs, pensions, dividends and capital gains will help boost one’s pension pot, ready for their retirement.
Emma-Lou Montgomery, associate director for personal investing at Fidelity International, shared her tips on tax returns and how pension savers can avoid a common mistake.
She urged Britons to declare their pension contributions.
She said: “If you pay money into a pension aside from your workplace pension, you need to make sure you’re entering those contributions onto your tax return, in the correct box and for the right amount.
“If you make a mistake here, you could either miss out on tax relief or claim too much – in which case HMRC could charge interest on the underpayment.
“If your employer deducts your pension contributions from your salary, you don’t need to enter these separately on your tax return, as the available tax relief will have been applied through your net salary.”
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Salary sacrifice can help to make an individual’s pension savings more tax-efficient and their employer might offer this as part of a pension scheme.
If people choose to take up the option, they and their employer will agree to reduce their salary, and their employer will then pay the difference into their pension, along with their contribution.
This would mean both employer and employee would pay lower National Insurance contributions too.
Ms Montgomery noted that there are however careful considerations to weigh up with this option and speaking to one’s employer first before making any decisions is key.
She warned: “Failing to make any separate pension contributions clear in your tax return could result in HMRC charging interest on the underpayment.
“The rates HMRC charge are linked to the base rate and the late payment interest rate is currently charged at six percent. When you pay into a pension you get tax relief, depending on your tax rate, on the contributions you make.
DON’T MISS
“To ensure you don’t miss out on tax relief you must agree to make declarations about your contributions which your pension provider will advise you on.”
Pension savings tax charge
The pension savings tax charge can often be missed as taxpayers don’t always realise they have a potential tax charge that needs to be reported to HMRC.
However Paul Barham, tax partner at Mazars explained that where adjusted income exceeds £240,000, the pension savings annual allowance, currently £40,000 a year, is reduced, meaning that individuals are able to pay less into their pension scheme in that year whilst receiving tax relief.
The minimum pension savings annual allowance available to someone after this reduction is currently capped at £4,000 for 2022/23.
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Any available unused annual allowances from the previous three tax years can also be utilised.
He said: “There are a few reasons why this is missed:
“1 Employer contributions count towards your adjusted income, therefore your adjusted income for this purpose may be higher than the total income shown on your tax return or P60.
“2 Employer contributions count towards the total pension contributions paid into your pension scheme for you, therefore utilising some of your pension savings annual allowance each year before any personal contributions are taken into account.
“3 Some jobs, such as people working within the NHS, have Government funded final salary pension schemes where pension contributions are paid into a pension scheme on their behalf, but they don’t have any control of the amounts being paid in, and they have little visibility of those contributions. This can cause unknown tax charges to arise.
“4 Taxpayers are not aware of the rules, and where their income exceeds £240,000, they are not aware that this is something that needs to be considered when preparing their tax returns. “
Millions of people are set to complete self-assessment tax returns in the coming weeks as the end of the month deadline looms.
But there are some common pitfalls that people fall into such as pension tax relief claims.
One of the common mistakes we see is taxpayers only reporting income that has not been taxed already, but that is incorrect.
All taxable income received must be included on tax returns, even if tax has already been deducted, so the correct tax due on income and gains arising in any tax year can be calculated, he explained.
