PensionsJun 26 2018

Making allowances: Minimising excess contributions

Search supported by
Making allowances: Minimising excess contributions

Pensions contributions sometimes amount to more than the member can reclaim tax relief on, and more than their annual allowance after carry forward. What happens next depends on the circumstances of the excess contribution.

First, it is important to distinguish between contributions in excess of a client’s UK relevant earnings and contributions in excess of the annual allowance.

Tax relief on personal contributions is limited by the client’s relevant UK earnings – which essentially are employed income, self-employed income and income from certain furnished holiday lets and patents. They are not income from items such as savings, dividends and buy-to-let properties. As a reminder, employer contributions aren’t tested against the individual’s relevant UK earnings, only the annual allowance.

Any contributions in excess of this level should not receive tax relief. It sometimes occurs that the client doesn’t earn as much as they expected, and therefore has paid excess personal contributions before they have realised there is an issue.

The member can request a “refund of excess contributions lump sum”, which is a refund of the contribution over their UK relevant earnings. The administrator will probably ask for evidence of the UK relevant earnings so they know what can be paid back. 

If the scheme administrator pays too much back it would be an unauthorised payment, meaning that there would be a tax charge. Needless to say, this should be avoided. The member should be sure that they have final correct details of their earnings before making the request to the scheme.

If the member has reclaimed any higher or additional-rate tax relief, they should contact HMRC to declare that a refund has been made because they will need to pay this back. If the member is doing self-assessment, it is likely this would be the point at which the overpayment of pension contributions would come to light. As a result, they can simply not make a claim for the relevant tax relief.

It is the member’s responsibility to ensure they don’t claim too much tax relief. If they do, HMRC can ask for the repayment directly. It is therefore advisable to ensure this doesn’t happen, and to try to monitor contributions throughout the year.

Due to the need to fully establish UK relevant earnings for the tax year, claims for refunds can only be done in subsequent years and up to six years later.

Exceeding annual allowance

Exceeding the annual allowance has never been easier, because members now have to deal with the standard annual allowance of £40,000, the tapered annual allowance – which could be anywhere between £10,000 and £40,000 – and the money purchase annual allowance that is now set at £4,000.