Pension Tax Charge – could you receive a surprise tax bill?
The Pension Tax Charge can cause a surprise tax bill of up to £13,500 or as much as £13,800 for Scottish resident taxpayers. Any individual can make pension contributions of £2880 net or 100% of their relevant UK earnings but must be aware that this is limited by the annual allowance and that relevant earnings do NOT include dividends and investment income. Meaning company directors who take a low salary from their company and make their remuneration up with dividends, must be specifically wary of this limit.
The key triggers for the pension tax charge are those individuals with income from all sources (less a few reliefs) in excess of £110,000 who have circumstances which will bring the annual pension contributions from all sources (both final salary and defined contribution schemes) close to annual contributions of £40,000 or brings the value of all pension schemes when added together close to the lifetime allowance.
It is possible the individual may have unused annual pension allowances from past years which can help offset any substantial pension contributions paid in any one year. The pension contributions can either be an employer contribution, an employee contribution or a mixture of the two, to which built up benefits from any defined benefit scheme are also added.
It’s a complex tax matter which will require looking back to check for the unutilised pension allowances in the past three years but the initial starting point are the statements issued annually by the pension companies. However, if undertaken, a pension review would spot opportunities for additional pension contributions and could potentially save additional tax of £13,500 or more!