Are you owed money by HMRC?

This month, a brief article on a couple of issues regarding private pensions and whether you are owed money by HMRC. This is something that often gets overlooked, especially if you deal with your financial arrangements yourself and have no financial adviser or accountant looking after your tax affairs in particular.

Pension Tax Relief on Contributions

If you pay contributions to a personal pension, you are entitled to tax relief up to your highest marginal rate of income tax. However if you are a 40% income tax payer or higher, the tax relief you receive will be handled in two different stages which means the second part is often overlooked. If you are a basic rate tax payer with earnings up to £50,000 and contribute to a private pension, then your contribution will be eligible for basic rate tax relief. This is applied at source for you meaning a pension contribution of £1,000 for example will be ‘grossed up’ to £1,250. If you are a 40% income tax payer (earnings >£50,000), then you are entitled to a further 20% tax relief on the contribution and indeed 25% if you pay income tax at 45%. To obtain this you need to remember to do a self-assessment tax return, for the tax year in question and having to remember is the main reason why it gets overlooked.

Refund of Tax where you have withdrawn money from a private pension

Another reason you may be owed money by HMRC, applies at the time you take money out of your private pension under the relatively new ‘Pension Freedom’ rules introduced 4 years ago. There are various ways of withdrawing money from a pension; not just by buying an annuity. Where you do so, the first 25% of what you withdraw is tax free. However the issue of being ‘overtaxed’ relates to the other 75% of what you withdraw as this is liable to income tax. The issue occurs where someone withdraws a lump sum from their pension. Because of this the pension provider is unaware of someone’s tax code when they do this and therefore they apply what is sometimes referred to as an ‘emergency tax code’ or tax that income on a ‘month 1 basis’. This makes the rather big assumption that a one-off withdrawal is going to be a regular monthly withdrawal and the income tax that is charged is on the assumption that someone’s income is as much as twelve times what it is in reality! So you withdraw an amount, have a significant amount of tax deducted and then it’s your responsibility to claim that tax back. Based on figures by HMRC it is believed that in the last 4 years over £400 million has been paid back in income tax to some 170,000 people who have accessed their pensions in this way. To claim this income tax back from HMRC you need to look at the following link:

https://www.gov.uk/government/publications/income-tax-repayment-claim-when-small-pension-taken-as-a-lump-sum-p53.

So you may be owed money on your private pension where you have paid contributions in, or indeed where you have taken money out. Have a think about your circumstances – you may be surprised by what is owed to you.

Author: Phil James, Grosvenor Consultancy Ltd

There are advantages and disadvantages to using all of these strategies and they depend on individual circumstances so don’t take action without seeking competent advice. Tax rules, rates and allowances are all subject to change. The Financial Conduct Authority does not regulate tax advice and some forms of offshore investments. The value of investments and the income from them can fall as well as rise,  you may not get back the full amount you invested and past performance is no guide to future performance.

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