A tax charge may arise to an individual if the amount saved in that individuals’ various pension schemes exceeds the annual allowance for that year.
If there is such a tax charge, the individual must disclose it on their Self Assessment Tax Return on the Additional Information pages (for the year to 5 April 2014 this was Box 10 under Other Information on page Ai4).
The amount of the annual allowances in recent years is as follows:
The current year’s annual allowance is deemed to be used first. If this is insufficient to avoid an annual allowance charge, any unused annual allowance from the three previous years can then be used. The earliest year’s unused allowance is used first then the next earliest and so on. The carry forward is automatic so it does not have to be claimed.
Unused annual allowance arises for a year if the amount of the annual allowance exceeds the total pension input amount for that year. Unused annual allowance is only available for carry-forward if it arises during a tax year in which the individual is a member of a registered pension scheme. However, even if the pension input amount for the year is nil carry forward would be available (if nil then the whole of the annual allowance would be carried forward).
The amount saved towards the individual’s pension benefits includes the following:
To see if an individual’s pension savings is more than the annual allowance he would need to look at the pension savings for PIPs that end in the tax year.
The pension input period (PIP) does have to be the same as the tax year. A PIP normally runs for a year but can be less than a year and may be longer than a year. An individual who is a member of a number of pension schemes may find that different schemes have different PIPs.
The pension scheme provider should issue a statement to the member whose pension input amount exceeds his annual allowance for a tax year. This should be issued automatically without the member requesting it and it should normally be provided no later than 6 October following the tax year. The statement should show the following:
However, if the member’s pension input amount does not exceed his annual allowance for a tax year then the pension scheme may not issue such a statement automatically and the member may need to request such a statement. The information requested by the member should be provided within three months of the request or, if later, by 6 October following the tax year. If the scheme administrator has not received the necessary information from the sponsoring employer of an occupational scheme, he is given until three months after receipt of that information to satisfy the member’s request.
No tax charge arises on an individual who goes above the annual allowance in a tax year if they:
Subject to the above exemptions, the annual increase in an individual’s rights under all registered pension schemes of which he is a member is measured against his annual allowance, and any excess over the annual allowance (increased by carry forward of unused allowances in previous three years) is chargeable to tax (called the “annual allowance charge”). For 2011/12 onwards the excess is charge as follows:
The charge is not dependent upon the residence or domicile status of the individual or the scheme administrator.
So effectively the excess contributions over and above the annual allowance is charged to income tax as though it were part of the individual’s taxable income and as if it formed the top slice of that income, although it is not treated for any tax purposes as income, so for example losses, reliefs and allowances cannot be set against it and it does not count as income for the purposes of any double tax treaty.
The individual himself is liable to the tax, although for 2011/12 onwards, if an individual’s tax liability on the annual allowance charge for a tax year exceeds £2,000 he may arrange for the tax to be paid from his pension scheme or schemes.