In the latter schemes, the annual allowance test does not take account of what contributions have been paid, just accrual in the scheme.
Minimising any excess
The first thing to consider is carry forward, which allows members to bring forward any unused annual allowance from up to three previous tax years. But this doesn’t bring forward unused tax relief, so personal contributions still need to be covered by the member’s UK relevant earnings in the tax year in question.
There are rules that stipulate that once the current year’s annual allowance has been used up, then the oldest of the three previous years must be utilised. This process continues until either all available annual allowances have been expended, or the excess over the year in question has been reduced to zero. See Box One.
If the excess can be extinguished by the use of carry forward, then there is no need to declare the excess or the use of carry forward to HMRC. But I would suggest ensuring that a record is kept, just in case.
Any contributions in excess of the annual allowance after the use of carry forward need to be declared on a self-assessment return. If the member doesn’t complete self-assessment and exceeds the annual allowance, they will need to apply for self-assessment. The details that form part of the self-assessment are relatively simple.
HMRC will not calculate the member’s carry forward or annual allowance excess – they will calculate the tax payable as a result based on the information provided. Nonetheless, it is best to try to estimate the tax due beforehand, especially if the member is going to ask the scheme to pay the charge on their behalf.
To do this, the excess amount is added to the client’s income to determine the tax rate on the charge. If the amount spans two tax brackets, then some of the charge will be at one rate and the rest at the lower rate.
The member will need to complete questions 10, 11 and 12 in the pensions section, details of which are:
10. This is the excess amount. For example, if a member’s pension input amount for the year was £120,000, but they had a £25,000 carry forward and an annual allowance in this year of £40,000, the excess would be £55,000 and should be entered in box 10.
11. This is the amount of the annual allowance charge that the pension scheme is going to pay under the scheme pays rules (see below).
12. This is the scheme reference number of the scheme that is paying the annual allowance charge in question 11.
Questions 11 and 12 can be left blank if the member is going to pay the charge themselves.
