HMRC in dark about tax allowance breaches

HMRC in dark about tax allowance breaches

HM Revenue & Customs (HMRC) is unable to tell how much tax it collects from people breaching various annual allowances, meaning the government may find it difficult to evaluate the outcome of any cuts to pension tax relief, FTAdviser has learnt.

Although the taxman collects data on the overall tax collected when people exceed their annual tax free limits, it does not know which source the revenue has come from, a Freedom of Information request revealed.

The government is currently eyeing cuts to pension tax relief as a source of additional revenue for the NHS.

But in response to the request from Canada Life, HMRC said it has no way of telling how much revenue came from the tapered annual allowance, money purchase annual allowance or standard annual allowance.

FTAdviser reported yesterday (6 September) that the lack of statistics also means the government isn’t able to evaluate the effectiveness of its cuts to the money purchase annual allowance, which was cut from £10,000 to £4,000 in April 2017, following an announcement in November 2016.

Rachel Vahey, product technical manager at Nucleus, said the lack of information makes amending pension tax difficult.

She said: "Pensions annual allowance is not a straightforward concept – there are three different ways of controlling pension contributions.

"Without more nuanced figures, HMRC is unable to say what tax was raised from each of them, and therefore unable to predict with any certainty what the effect of changing any of these limits would be."

HMRC also does not hold information on individuals' allowances, meaning it is up to taxpayers to inform the taxman of any tax due.

An HMRC spokesperson said: "The annual allowance, whether the standard annual allowance, money purchase annual allowance or tapered annual allowance, is specific to an individual’s circumstances so it is for them to inform HMRC if they exceed the allowance.

"HMRC compliance activity will identify unreported breaches."

The annual allowance is a limit on the amount that can be contributed to pensions each year, while still receiving tax relief, currently set at £40,000.

The tapered annual allowance, currently set at £150,000, is applied to high earners, and means that for every £2 of income above £150,000 per annum, £1 of annual allowance will be lost.

The MPAA, currently at £4,000, is the amount a person who has already begun drawing on their pension can pay back into their retirement pot in a given year without incurring a tax charge.

Sir Steve Webb, director of policy at Royal London and former pensions minister, said it was "astonishing" that HMRC had so little data on the "complex system that they have created".

He said: "Good policy making must be based on good data, and yet HMRC seem to know almost nothing about the level of annual allowances people are facing.

"In this technological age, it is time that HMRC had a much more rounded position of where people stand with regard to their tax relief limits and this in turn might lead to better policy making."