Pension Annual supplement Taxation

Pension year allowance tax is payable to HMRC when you have exceeded your annual pension allowance in a tax year and you have no early allowances available or the amount of the early allowances and the current year’s allowance do not add up to cover the pension contributions paid in a tax year .

HMRC does not apply tax to the annual allowance for pensions for exceeding their annual allowance in a tax year if they:

• retired and withdrew all their pension pots due to serious ill health
• died

The taxation of the annual allowance for pensions comes as a shock to many employees who received a large bonus from their employer, pushing their adjusted income for the tax year through tax years 2022/23 above 240,000, thus reducing their annual allowance and it is too late for them to reduce their pension contributions for the tax year ended April 5, 2023.

Pension Annual allowance Taxation Who has to pay?

Your excess retirement savings may be taxed in whole or in part at 45%, 40% or 20%, depending on your taxable income and the amount of excess retirement savings. For example, if your adjusted income for the 2022/23 tax year is 300,000 and your declining annual allowance is 4,000, but you contributed 20,000 to your retirement savings in the tax year, then you must pay 45% tax on the deductible of 16,000 retirement savings = 7,200 to pay to HMRC for tax year 2022/23.

If you meet certain criteria, your pension scheme must pay this pension annual fee for you if you indicate this, this is also referred to as a mandatory scheme.

In some cases they can choose to pay the annual pension tax for you, even if they don’t have to, this is also called a voluntary arrangement. You need to check if your schedule does this.

If your scheme does pay the pension allowance tax for you, it must reduce your benefit.

If the annual pension supplement exceeds 2,000

You can instruct your pension scheme to pay (part of) your annual contribution if:

• your retirement savings with that plan is more than the annual allowance (currently 60,000) for that tax year
• your tax burden is more than 2,000 for that tax year
• you told them before the deadline of July 31 of the year after the next tax year

There may be instances where your arrangement doesn’t have to pay all of your tax expense, even if it’s over 2,000, and you have to pay the rest of the amount.

You must let your pension scheme know in time how much you want them to pay for you.

If you instruct your pension plan to pay the tax, you cannot change your mind. If the tax you owe changes, you can ask them to change the amount they pay.

How to tell your pension plan to pay the pension tax

You must submit your pension scheme electronically or in writing, stating:

• your title
• your full name
• your adress
• your national register number (or, if you do not qualify, the reasons why)
• the tax year for which the levy applies
• the amount of tax that you want the scheme to pay
• confirmation that you have calculated the tax with the correct rate
• confirmation that you cannot cancel your application
• confirmation that you know that your benefit will be adjusted
• confirmation that you submitted the request in person or your signature and the date

If the Pension annual allowance is 2,000 or less

Your pension plan may choose to pay the tax in full or in part, but it does not have to. If your arrangement does not pay the tax, you must pay it yourself.

If your retirement plan agreed to pay the tax but failed to do so, you must pay it, plus any penalties and interest if you missed the deadline.

You should check that your plan paid the fees on time, as you may be charged interest for late payments.

What to check

If your retirement plan pays this tax for you, check to see if they have reduced your benefit.

If your plan does not reduce your benefit, you must take aunauthorized payment charges.

Declaration of taxation of the annual supplementary pension on your tax declaration Self-assessment

Use theHelp sheet HS345 pension savingsto complete your income tax return.

You must ensure that:

• you fill in box 10 if you have a tax levy, even if your scheme pays all or part of it
• if your pension scheme pays (part of) the tax, you put the amount they pay in box 11 on the SA101
• you request your pension schemes Pensioenregeling Fiscaal Characteristics (PSTR) and put it in box 12 of the SA101
• if more than one pension scheme pays part of your tax, complete the remaining information box on page TR7 on the SA100

If you have told HMRC that your scheme will pay some or all of your tax withholding, make sure you tell your scheme this too.

Whatever type of pension scheme you are in (for example an average pay scheme), you need to know your pension savings so that you can:

• income threshold
• adjusted income

If you saved more in pension savings during the tax year than your available annual money, you must include the excess in your income tax return. Your available annual allowance is your reduced allowance plus any unused allowance from the previous 3 tax years.

This amount is added to your taxable income and you pay income tax on it, at the tax rate that applies to you.

Calculate your net income

1. – Add up your taxable income for the tax year.
2. Subtract any applicable tax credits, such as payments to your retirement plan that didtax reductionbut were paid before the contribution was granted (because your pension scheme is not set up for automatic exemption or because someone else paid your pension).

Your taxable income may be:

• income from work
• income from self-employment or partnerships
• most retirement income (state, company, and personal pensions)
• interest on most savings
• income from shares (dividend income)
• rental income
• income received by an individual from a trust

If you don’t know how to calculate your net income, a financial advisor specialized in taxes and pensions can help you.

Check whether you levy a Pension annual tax deduction on your pension savings

You cannot use this calculator if you participate in a hybrid plan.

You can use this calculator if you are a member of:

• UK registered pension scheme
• Eligible Foreign Retirement Plan

Before you start

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