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Annual allowance for higher rate taxpayers

Whose responsibility is it to monitor the limit?

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I have a few clients who are employed additional rate taxpayers. Both employee and employer contributions are made to an employer pension scheme.

If the maximum annual allowance is restricted to £10k, then any additional contributions should be added back in the tax return or, in fact, not made at all.

Whose responsibility is it to ensure the contributions are within the limit - the taxpayer, the employer, the pension provider or the accountant?

A new client submitted her own tax return and was obviously unaware, yet I believe the limit has been breached. There may be unused relief from prior years, I will ask for this.

HMRC seem to think the pension provider would let the taxpayer know but how would they know the salary? It says you’ll get a statement from your pension provider if you go over the annual allowance.

https://www.gov.uk/tax-on-your-private-pension/annual-allowance

Any thoughts please?

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09th Jan 2019 22:42

I have certainly seen statements from pension providers for some clients. Whether they would have understood the import of these if trying to DIY I rather doubt. Generally they have come from the financial adviser & the client has been taking proper advice.

Going by the number of losses re NRCGT on 'ignorance of the (new) law' one suspects that a claim of ignorance by the client word obtain similar short shrift.

I doubt that it could ever fall on the employer, and the pension provider will probably have covered themselves by the act of issuing a statement.

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By Matrix
to Paul D Utherone
09th Jan 2019 22:52

Thanks. I think these earners may have made different decisions if they had known.

By the time I get the figures it is too late.

I wonder whether they received letters when the rules changed.

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09th Jan 2019 23:06

I'd understood that the contributions could be made, with a tax charge if the limits were breached. Am I wrong? It's a live scenario if so, as I'm days if not hours away from submitting the return.

If I'm right, surely the responsibility lies solely with the taxpayer - under self assessment.

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By Matrix
to Tax Dragon
09th Jan 2019 23:23

Well have a look at the link but it says you need to let the pension provider know by 31 July if you want the tax to be deducted by the scheme.

Otherwise they will need to find the cash to pay it.

Will it be another debacle like HICBC?

It seems that these employees could have had £20k e'ee and £20k e'er contributions for 20 years and suddenly they find they have a liability.

My point regarding the employer is that they know their salary so would know that the relief would be restricted and as for the pension scheme, they should restrict the basic rate tax reclaim. But it is up to the taxpayer to work it out of course.

I should add that it is possible to claim higher rate tax relief even if the annual allowance is exceeded on both HMRC and third party software.

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to Matrix
10th Jan 2019 11:01

The employer might know what the salary is, but they're not an IFA acting for the employee who should give advise or even an appointed tax agent giving tax advice. They are only the employer deducting tax under PAYE as agent for HMRC.

At best the employer might send some bland / generic notes regarding pension. Maybe they could send a general note encouraging higher paid employees to take advice regarding pensions, but they cannot have any obligation.

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to Tax Dragon
10th Jan 2019 11:00

You are correct.

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to andy.partridge
14th Jan 2019 13:42

Thanks Andy.

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09th Jan 2019 23:26

It's the taxpayers responsibility to get this right.
The limit does not restrict the amount that they or their employer can pay into the pension. If the limit is breached, however, the taxpayer is subject to an income tax charge. It's self assessment.

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By Matrix
to trust.pem
09th Jan 2019 23:31

So a bit like HICBC then? You get the benefit but have to work out for yourself that you have to pay it back.

What do you think is happening in practice?

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to Matrix
10th Jan 2019 11:02

DIYers will no doubt be filing incorrect returns. No change there. The important thing is that we know the rules so that we are not ignorantly filing incorrect returns.

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By John R
10th Jan 2019 10:40

Tax relief is available on employee contributions (subject to the net relevant earnings being in excess of the contributions paid or less than £3,600 gross). Employer contributions should not be restricted subject, of course, to the wholly and exclusively test. You should not therefore be restricting the claim in the self-assessment return because of an excess over the annual allowance. Instead, you have to make an entry on the additional information pages of the return showing the tax charge arising. This has been the situation for several years. Tapering was introduced in 2016-17 for certain high income individuals and this has resulted in many more individuals being caught including several of our clients.

One problem is that employer defined benefit pension schemes such as the NHS scheme, are only required to provide their employees with pension input statements if the inputs for that particular scheme exceeded the full (currently £40,000) annual allowance. So those with contributions to other schemes or whose allowance is tapered may not be notified. Remember that pension inputs for defined benefit schemes bear little relationship to the actual contributions so you cannot rely on payslips etc to determine whether the annual allowance has been exceeded.

It is still the individual's responsibility (or their accountant's - check your engagement letter) to check the position and if they fail to do this, they may be faced with extremely high liabilities for tax, interest and penalties, when the position is eventually recognised. Not only that, but there is a deadline for applying for the scheme to pay the tax charge (31 July immediately following the self-assessment deadline).

In my view, all accountants should be aware of these rules as clients will be looking for someone to blame when this goes wrong.

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to John R
10th Jan 2019 15:33

I agree but as a matter of interest what has the "wholly and exclusively test" got to do with the annual allowance? It's only relevant from the employer's tax point of view, and in practice will virtually never be an issue.

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By John R
to tonycourt
10th Jan 2019 16:15

It has nothing to do with the annual allowance charge. I was referring to the deductibility by the employing company in that the remuneration package including pension contributions has to be commensurate with the duties performed.

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14th Jan 2019 10:39

having had to deal with one of these it is definitely the empoloyees responsibility. I understand that the Pension Providers make some sort of disclosure.

With goverment schems you need to check to ensure that the employees contribution is included in the Pension Value increase.

If you are working out carried forward pension allowances (if that is the right term) you need to go back a few years and check that these have not already been used. Dont forget in 2017 there were two allowances on offer

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to pauljohnston
14th Jan 2019 10:46

FYI The double annual allowance was 2015/16 but it's not as simple as saying there was £80,000 for the year. You need to look at two periods to 9 July and 9 July onwards.

Royal London website explains it quite well:
https://adviser.royallondon.com/technical-central/pensions/contributions...

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to tonycourt
14th Jan 2019 13:41

Tony's right. It was possible to have relief of £80,000 in 2015/16, but not to carry it forward. I sometimes wonder how many MPs on the governing side made full use, compared with those on the opposition benches. Maybe not as much of a difference as I might guess.

It's also easy to get the PIP point wrong for contributions before 9 July. That rule change was a good one.

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