HM Revenue & Customs' request for pension administrators to remind their members about potential tax breaches has been branded ‘very unsatisfactory’ by a former pensions minister, who said the tax authority was offloading its own responsibilities onto schemes.
In its monthly newsletter last week, HMRC stated that members are forgetting to declare details of their annual allowance charge on their self-assessment returns, and asked scheme administrators to remind these individuals of their duties, even if the scheme is paying the tax charge.
Sir Steve Webb, director of policy at Royal London and former pensions minister, told Pensions Expert that the “whole process of expecting schemes to alert members to potential annual allowance issues is very unsatisfactory”.
He said: “Schemes only see the input in their own scheme and will have no idea if members have breached a non-standard annual allowance.
“Given that HMRC could get pension data from schemes and income data from members, it is hard to see why HMRC cannot piece this information together rather than expecting members and schemes to do the work.”
Schemes only see the input in their own scheme and will have no idea if members have breached a non-standard annual allowance
Sir Steve Webb, Royal London
HMRC declined to comment on this matter, due to the election purdah period.
Schemes in dark about tax breaches
David Robbins, senior consultant at Willis Towers Watson, explained that schemes are not always in a position to know whether someone has to pay an annual allowance charge.
“First, for high earners potentially affected by the tapered annual allowance, schemes won’t know what the individual’s allowance is, as this can depend on non-pensionable earnings and outside income.
“Second, administrators will only know the pension input in their scheme; whether the individual has exceeded their annual allowance for a given year is determined by the total value of their pension inputs across all schemes.”
Mr Robbins also explained that members will only have to pay a tax charge if this cannot be covered by unused allowances carried forward from previous years – “which will depend on historic income and pension contributions, potentially from a time when the individual was employed elsewhere and did not belong to that scheme”.
Currently set at £40,000 a year, the annual allowance limits the amount people can contribute to their pensions each year tax free.
The taper gradually reduces the annual 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.
Rachel Vahey, senior technical consultant at AJ Bell, agreed with HMRC that scheme administrators should send a communication to members over the next couple of months before the January self-assessment deadline.
However, she noted that it will be a “fairly general” communication piece, since administrators and trustees do not know who they should target this reminder to.
“Scheme administrators already have to alert members who have exceeded their standard annual allowance or their money purchase annual allowance (MPAA) within the scheme.
But they will not know in cases where the member has exceeded their tapered annual allowance or split their contributions over several schemes.”
Scheme pays causing confusion
In some cases, members asking their scheme to pay their tax charge via ‘scheme pays’ may have forgotten to make a correlating entry in their self-assessment return.
Scheme pays allows savers to settle annual allowance tax charges of more than £2,000 through the pension scheme without needing to find cash up front. Instead, their benefits are adjusted at retirement and will pay interest.
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Mr Robbins explained that there will be cases where “a member knows what their annual allowance charge is and wrongly thinks that, because they are asking the scheme to pay the charge for them, they don’t need to put it on their tax return”.
Unlike with mandatory scheme pays, where pension input in the scheme must exceed £40,000, elections for voluntary scheme pays should be received by the scheme before the individual’s tax return deadline, he noted.
“Of course, to use scheme pays, people have to know that they face a tax charge in the first place. There is probably a wider problem of people not realising this, particularly where their pension input is below the standard £40,000 limit,” he concluded.
