Some pension savers could be missing out on pension tax relief by not filling out a tax return – but there’s still time to submit.
There are other reasons you may need to file a self-assessment tax return, such as if you breach your annual allowance on your pension.
With the 31 January deadline looming to file online, you may want to file sooner rather than later.
Here, we explain six things pension savers need to know to get their self-assessment tax return right.
1. Pension tax relief depends on your income tax
As an incentive to save for retirement, you get tax relief when you save into a pension. But how much you get depends on how much income tax you pay. The following rates apply to England, Wales and Northern Ireland.
Income taxes in Scotland are different. Find out more in our guide to income taxes in Scotland.
2. How you claim depends on your pension scheme
There are two main methods to claiming tax relief:
Net pay: Pension contributions are deducted from your salary before income tax is paid on them. Your pension scheme automatically claims back tax relief at your highest rate of income tax. This means you’ll get the full tax relief you’re entitled to without having to claim it yourself.
Relief at source: This applies to all personal pensions and some workplace pensions. Pension contributions are paid after you’ve paid income tax. Your pension scheme will send a request to HMRC, which will pay 20% tax relief into your pension. This means higher and additional-rate taxpayers will need to submit a self-assessment tax return to claim the extra tax relief they’re entitled to, or contact HMRC directly.
For example, if you earned £60,000 in the 2021-22 tax year and put £15,000 into a private pension, you’d automatically get 20% tax relief at source on the full £15,000.You can claim an extra 20% tax relief on £9,730 (this is the amount of income you paid higher-rate tax on) through your self-assessment tax return.
If you’re unsure, it’s worth checking with your pension scheme to find out what method it uses.
3. You can backdate claims
If you forgot to claim tax relief for a previous tax year, you can do so up to four years after the end of the tax year you are claiming for.
To make a claim, you can go directly to HMRC – see its guide on how to claim a tax refund.
4. You may have breached your annual allowance
The government puts a limit on the amount of pension contributions you can earn tax relief on. This is called the pensions annual allowance and it’s set at 100% of your income or £40,0000 – whichever is lower.
This means that any pension contributions you make over the limit will be subject to income tax at the highest rate you pay.
However, you can carry forward unused allowances from the previous three years, as long as you were a member of a pension scheme during those years.
If you exceed the annual allowance in a year, you won’t receive tax relief on any contributions you paid that exceed the limit, and you will be faced with an annual allowance charge.
This charge is added to the rest of your taxable income for the year to work out your overall tax liability.
You’ll need to fill out a self-assessment tax return to detail how much of your pension contributions exceed the annual allowance and work out how much is due.
According to government data, in the 2020-21 tax year 41,000 individuals reported pension contributions exceeding their annual allowance through their tax returns.
The total value of contributions reported as exceeding the annual allowance was £764m in 2020-21 – a decrease from £1bn in 2019-2020.
5. You may have a reduced annual allowance
If you have a high income, you might have a reduced annual allowance.
This will be the case if your adjusted income is above £240,000. Adjusted income is made up of your salary, dividends, rental income, savings interest and any other income you receive.
This means that for every £2 of income over £240,000, your annual allowance is reduced by £1.
The maximum reduction is £36,000; anyone with an income of £312,000 or more has an annual allowance of £4,000.
You could also have a lower annual allowance if you have already begun to draw your pension. This will reduce your annual allowance to £4,000. This is called the money purchase annual allowance, or MPAA, and applies to people who have taken money from a money purchase, or defined contribution pension.
6. Your pension scheme may pay the charges
If your pension contributions have exceeded your annual allowance, you might be able to ask your pension scheme to pay any tax charge on contributions above the annual allowance directly to HMRC.
This arrangement is known as ‘scheme pays’. The charge is then taken out of your pension pot, meaning you don’t have to fund it by other means.
However, you still need to disclose the annual allowance charge on your tax return or risk being penalised.
All registered pension schemes must offer a ‘scheme pays’ facility, but you must meet the following criteria to use it:
There is government guidance on what to fill in your self assessment tax return box.
Get more self-assessment tips
If you’re filing your first self-assessment tax return or want to refresh your memory on what you need to do, Which? has plenty of helpful information to make the process easier.
See our guide on how to fill in your tax return, why you need a UTR number, and what happens if you’re late filing your tax return and paying your bill.
File your 2021-2022 tax return with Which?
If you haven’t yet submitted your 2021-22 tax return, the Which? tax calculator could help.
Our online tool is easy to use, jargon-free and helps you tot up your tax bill. What’s more, it will even suggest areas where you might be able to claim expenses that you might have forgotten about.
When you’re finished, you can use the tool to submit your tax return directly to HMRC.