Savers could be facing large tax bills as a result of failing to report pensions growth on their tax returns.
In its recent pension schemes newsletter, published today (November 26), HM Revenue & Customs said it was aware that some individuals have not reported breaching the annual allowance, which is currently £40,000.
Therefore it has asked pension scheme administrators to remind members who have exceeded their annual allowance for 2018/19 to declare this charge on their self-assessment tax return.
This would also include growth in individuals’ defined benefit pension rights alongside cash paid into their defined contribution pots.
People who have used scheme pays, whereby their pension scheme pays the tax charge from their pension, must also declare this charge on their tax return, it warned.
Savers who fail to do this are at risk of receiving a large tax bill as anything above the annual allowance is charged at the individual’s income tax rate which could be 40 or 45 per cent.
Sir Steve Webb, former pensions minister and director of policy at Royal London warned the ramifications of this oversight could be "huge".
He said: “The shocking saga around the annual allowance for pension tax relief gets worse. We now have HMRC admitting that they know that people are forgetting to put information about their pension tax bills on their annual return.
“But filling in this tax return question requires individuals to understand the system, especially if they are affected by the tapered annual allowance.
“Thousands of people could be set to face huge tax bills because they have innocently failed to declare this information on their tax return."
Sir Steve warned pension schemes will only notify members if they have breached the £40,000 annual allowance limit.
If an individual falls under the tapered annual allowance and their yearly allowance is between £40,000 and £10,000, the scheme may not be aware of this and may fail to notify the member accordingly.
This could lead to the individual entering ‘zero’ on their tax return, which could land them with a significant tax bill.
The tapered annual allowance gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits.
The taper means that for every £2 of adjusted income above £150,000 a year, £1 of annual allowance will be lost.
Sir Steve said: “HMRC needs to get to the bottom of how many people have failed to declare this information and contact them immediately.
"And the next government needs to radically simplify the tax relief limits, to avoid this sort of situation happening again.”
What do you think about the issues raised by this story? Email us on email@example.com to let us know.