Pension tax tips pre-return

Budget 2024

These tips help taxpayers get all the pension tax relief to which they are entitled or to avoid an unexpected tax bill in years to come.

  1. A) Claim higher rate relief on personal pension contributions:

Many pension savers who pay income tax at the higher (or additional) rate, may be unaware that they need to claim higher rate relief through their tax return on contributions into a personal pension. Employee contributions into a personal pension or group personal pension automatically attract pension tax relief at the basic rate through the ‘relief at source’ method. This tax relief is claimed by the pension provider on behalf of the member.

But those who pay tax at the 40% or 45% rate only get their extra tax relief if they claim it through their tax return. For example, someone who pays £80 into a personal pension automatically gets an extra £20 in basic rate relief added to their pension. But if they pay tax at 40% they are entitled to another £20 in tax relief which they will only get if they enter this information on their tax return.

  1. B) Report contributions in excess of your annual allowance

Individuals are expected to report on their tax return any pension contributions (from themselves or their employer) into a Defined Contribution pension and/or any growth in Defined Benefit pension rights in excess of the Annual Allowance, so that additional tax can be paid.

  1. C) Report contributions made on your behalf under ‘scheme pays’

HMRC recently admitted that some taxpayers were failing to report on their tax return that a pension tax charge had been paid on their behalf by their occupational pension scheme. A new FOI obtained by Royal London shows that in 2016/17 just over 1,000 people failed to report this information. As the number of people affected by ‘scheme pays’ has grown rapidly since 2016/17, it is likely that thousands of people are now failing to report this information. The FOI from HMRC says that this is a case of ‘under-reporting, not under-payment’, but taxpayers are expected to give complete information on their tax return.


Good news for child trust funds

Young people with a Child Trust Fund (CTFs) could see their savings automatically rolled into a new tax-free savings accounts at maturity under new government proposals. The first Child Trust Funds are due to mature in September this year and, under current arrangements, will be automatically cashed in once the account holder turns 18. CTFs could instead be automatically rolled over into another account that continues to shelter the young saver’s cash from the taxman. Child Trust Funds were launched in 2005 as a way to encourage parents to start saving for their children.

Children born between September 1, 2002 and 2 January 2, 2011 received between £250 or £500 to be invested on their behalf. Parents, family and friends could continue to contribute to the account, with all gains tax-free. More than 6 million CTF accounts were opened and no money could be withdrawn until the child reached age 18. That means the first tranche of accounts will mature in September 2020. But CTFs were discontinued in 2011 and replaced with the Junior Isa. For years, children with CTFs were left in limbo as savings providers stopped offering new products as Jisas took precedence. In 2015, the Government ruled that money held in CTFs could be transferred out to a Jisa. For those who kept their money in a CTF, the money would automatically cash out once the accountholder turned 18. But many have considered this to be unfair. Junior Isas are automatically rolled into adult Isa accounts when a child reaches 18, meaning they continue to enjoy their tax-free status. The Government’s latest move looks to be levelling up the playing field.

Interest and mortgage rate uncertainty

Despite a decade of rock-bottom interest rates, the Bank of England is under pressure again to cut rates after new data showed the economy went into reverse before December’s general election. The actions of central banks can seem distant to everyday life but have significant ramifications for the cost of borrowing and rates savers receive on their cash. When the Monetary Policy Committee meets on January 30, the health of the British economy will be the main talking point. GDP slumped by 0.3% in November from a month earlier, according to the Office for National Statistics. Meanwhile, inflation has declined steadily since 2018 and now sits at just 1.3%.

The pound has slipped on the gloomy numbers, reaching 0.7% against the dollar to below $1.30 for the first time this year. In May last year predictions of interest rate rises were proven correct – again. The Bank of England rose rates to 0.75% but stopped there. With investors now forecasting a rate cut, what do experts expect now? The consensus is that he latest low inflation figures have increased the chance of a rate cut, but his base case is still for no change. This refutes the view of traders who now expect a 63% chance of a rate cut. It will depend on where the economy goes over the next few months. The economy weakened before the general election but we could see a turnaround in business optimism and spending. If this happens then the Bank of England will do nothing for a while, most believe. Over the medium term, higher rates are likely as a result of a tightening labour market, increases to the minimum wage and increased government spending. All these factors could contribute to higher inflation.