Getting your tax return wrong could mean missing out on valuable tax relief on your pensions. For most people, the key information to declare is any contributions made to a private pension – either your employer’s scheme, or your own private pension. You’re entitled to tax relief at your highest marginal rate of income tax: 20% for basic-rate taxpayers, 40% or 45% for those on the higher rates – but you only get 20% automatically.
If you’re in a company scheme, it should make the claim for any extra relief due on your behalf – just check you’re getting what you’re entitled to. But private pension providers only make a 20% deduction on your behalf, so if you’re a higher-rate taxpayer you need to claim the extra 20% or 25% yourself.
Also be aware of your annual allowance – this is a cap on your total contributions to all private pensions, and you will be penalised if you breach the maximum. For most people, the annual allowance has been £40,000 since the 2014-2015 tax year. You can’t normally pay in more than you earn in a year, other than a £3,600 allowance to which everyone is entitled. It’s easy to check in most cases – just add up all your private pension contributions. But for members of defined-benefit schemes (who get guaranteed benefits in retirement) the rules are more complicated – ask your scheme administrator for a precise figure.
Also, if you’re a higher earner, you get a lower “tapered annual allowance”. For each £2 your income exceeded £150,000 in 2016-2017 – your taxable income from all sources plus the value of your employer’s pension contributions – your annual allowance falls by £1, until you reach an income of £210,000; at which point the allowance stays at £10,000.
If you’ve used up the allowance, you may be able to use the carry-forward rules, by which you can bring forward unused allowance from each of the past three tax years and add it to this year’s cap. So if you’re over the annual allowance for 2016-2017, unused allowance from 2013-2014, 2014-2015 and 2015-2016 may help you reduce or avoid charges.
If you are in danger of exceeding the allowance, your pension providers should have alerted you. HMRC has online guidance explaining how to calculate and pay any extra fees due, though you may also be able to get the tax paid by your pension-scheme provider from your benefits. But always check the annual allowance position for yourself, as your provider may not have all the relevant data.
Do I have to declare my state pension?
If you’re already claiming pension benefits in retirement and haven’t previously been required to file a tax return during your working life, your pension income won’t normally change this.
There is, however, one exception. If you’re receiving state pension benefits that are worth more than your annual personal income-tax allowance – which stood at £11,000 for the 2016-2017 tax year – and have no other sources of income, then you will need to complete a tax return, unless you started claiming your pension on or after 6 April 2016.
This may seem odd, given the relatively low sums involved, but the situation arises because state pensions are paid before tax is deducted. Where your total income in retirement exceeds the personal allowance and you have tax to pay, this is normally taken from your private pension. But if the state pension is your only source of income, this isn’t possible, which is why you’ll need to file a tax return so that you can be taxed appropriately.
If you are filing a self-assessment return for another reason, you will also need to declare all state and private pension income you receive, along with details of the tax you have paid on the latter.
Claiming tax relief on VCTs and the EIS
If you’re a wealthier investor, you may need to use your tax return to claim any tax relief that you’re due to receive on other types of long-term savings plans – notably venture-capital trusts (VCTs) and the enterprise-investment scheme (EIS), as well as the seed enterprise-investment scheme (SEIS). There’s a specific question on the standard self-assessment form that asks you if you want to do this.
With the EIS and the SEIS you need to have a certificate showing its qualifying status from the company in which you have invested (this will be an EIS3 or EIS5 form). You can claim tax relief for up to five years after the 31 January that follows the tax year in which you made the investment. The maximum you can claim for any one tax year (from 2012-2013) is £1m. However, you don’t have to wait; you can also claim in the current year and request a change to your PAYE tax code or for an adjustment to any self-assessment balance-on-account payments you need to make, to reflect the tax relief claimed.
With VCTs, you can use your tax return to claim income-tax relief for the year in which the shares were issued to you. You can claim tax relief on the first £200,000 you invest in any one tax year, but you cannot claim more relief than you owe. As with the EIS, you don’t have to wait until you send in your tax return to get the benefit of the relief. HMRC will make an adjustment to your tax code or pay a tax refund if you claim earlier.
Tax tip of the week
If you have foreign income from interest payments or dividends, then you need to declare it on your tax return, unless the income is solely from dividends and is less than £300. (If you are “non-domiciled”, the limit is £2,000 in any foreign income or gains, so long as the money is not brought into the UK.) Include details of tax that has already been withheld abroad if you want to claim foreign tax-credit relief. The amount of relief available will depend on the UK’s double-taxation agreement with the country in question and you may need to reclaim some tax from the foreign tax authority to avoid paying tax twice. This may require you to get a certificate of residence from HMRC, to prove that you are a UK resident.