Are you a well-paid doctor, teacher, civil servant, judge, armed forces personnel or other public sector worker? Are you about to get tax grabbed from your pension?
Thousands of doctors, teachers, civil servants, judges, armed forces personnel and other public sector workers have been caught by swinging tax charges from HMRC– all because of the way their pension schemes work.
Go back 4 or 5 years or so and this was a problem for only around 5,000 people a year … but over the last couple of years the number of people caught by the restrictions has increased hugely. 20,000 people in 2017, 26,000 people in 2018 and this number is expected to increase again to over 37,000 people this year.
As the number of people caught by the tax charges increases year on year, so does the amount of tax collected! From £200m a few years ago to over £1bn! Or to put it another way, an average of £38k per person per year in 2017/18! A huge tax grab from those affected.
This is particularly a problem for those with occupational or final salary pension schemes – like teachers, doctors, civil servants, judges, armed forces and other public sector workers. What makes it worse, is that this is a hidden tax charge. Often the individual concerned has no idea that there is a problem and that the taxman is about to hit them with a huge tax bill …until a letter drops through your letterbox.
Typically those affected receive letters from their pension provider each October telling them if they have exceeded the annual contribution allowance – if this is you, then take action! If you are worried or caught by the pension contribution restrictions then we can help demystify them and explain clearly what is happening, as well as help you practically with the appropriate tax returns.
Who needs to be worried? Broadly speaking there are three groups of people that might be caught by HMRC’s pensions tax grab:
- Individuals who are receiving a pension income but are still contributing to a pensions saving pot.
If you are in receipt of pension income you can normally only contribute £4000 pa into your pension scheme …any excess will be taxed!
- People who earn in excess of £150,000. The standard annual allowance of £40,000 pa in pension contributions is reduced for higher earners.
Clearly, if you as an individual are making payments directly into a pension scheme, then you can control the amounts you pay and avoid any tax charges on excess pension contributions. This contribution limit includes both the amount that the individual contributes and the amount the employer contributes. However, as an employee you often have no control over the amount that is contributed! You have to abide by the scheme rules or employer rules.
- People who are in an occupational or final salary pension scheme who get a payrise …and especially high earners who get a payrise!
The problem here stems from the nature of how the contributions to the scheme are worked out by your employer or by the pension scheme. Take somebody with 20 years’ service earning £50,000 who gets a promotion and payrise to £60,000. Their employer pension contribution could be deemed to be some £69,000 or more – ie much bigger than the contribution limit and potentially meaning a £11,600 tax bill or more.
And what if you are a higher earner and get a promotion and payrise? Well, you get a double whammy with an excess contribution and a reduction in the annual contribution limits. Meaning that the amount that is taxable becomes much, much bigger. We have had clients in this situation whose excess pension contribution tax bill was bigger than their annual take home salary.
Importantly, note that most pension scheme rules allow you to get your pension scheme to pay the tax for you. Bearing in mind the swinging size of some of the tax bills from these excess contributions that is very important – especially for those facing penury! Whilst this means that you personally don’t have to find the money there and then – it has a long term impact on your pension because your pension pot decreases by the amount paid out to the taxman. …and your retirement income is reduced. But then, the only time politicians say tax should be fair is when they are husting for your vote!
Caught by an excess pension charge? Need help from a tax accountant? Then get in touch!