The next tax bill from the Revenue could come as a bit of a bolt out of the blue for some. This might be the last chance to avoid a nasty surprise!
Unless your relevant income was below £130,000 for all three years ending 5th April 2010, you may have to pay a special annual allowance tax charge on any unprotected pension input amount in excess of the £20,000 special annual allowance, or the £30,000 enhanced special annual allowance (if applicable).
31st October 2010 will be the first opportunity for many clients to tell the Revenue about this. This is because, if a client is submitting a paper tax return for 2009/2010, they will normally need to get it to the tax office by 31st October 2010.
How does an individual report a special annual allowance charge?
It's actually surprisingly difficult! There's no obvious clue on the return but the answer is to tick the yes box at the end of the question 9 on the second page of the tax return.
You or your accountant must enter the amount of any pension saving that is in excess of the special annual allowance in box 9 on the back page of the additional information pages.
What are the consequences of not reporting a special annual allowance charge correctly?
The Revenue may make an incorrect assessment of a client's liability to tax if they're not made fully aware of the client's position.
Let's take a look at three possible scenarios:
a) If the charge arises because of an individual's contribution
If the relevant income for 2009/2010 is £130,000 or more and if their pension contribution is more than £20,000, it's likely that the Revenue will automatically calculate a special annual allowance charge on the excess contribution over £20,000 when they process the tax return.
The Revenue should enquire as to why the excess wasn't reported. They may launch a full investigation.
Of course, the Revenue's calculation may be wrong, perhaps because the individual is in fact entitled to an enhanced £30,000 allowance, or maybe because their pension contribution is protected, or for a number of other reasons?
Either way any tax bill and Revenue correspondence are likely to come as a bolt out of the blue. This would cause them a fair amount of anxiety - and extra accountancy fees.
b) If the charge arises because of an employer contribution, or because of a defined benefit scheme accrual
Even if the contribution is paid by an employer, it's always the member who's liable to pay the special annual allowance charge. But how will the Revenue pick up that there should be a special annual allowance charge in this situation?
It's a good question. There's nowhere on the tax return to report employer pension contributions or defined benefit scheme accruals. So it appears that if the individual or their accountant fails to report it correctly there isn't another obvious mechanism for the Revenue to pick it up.
However, it's highly likely that the provider or the scheme administrator will have sent correspondence to the member informing them of the pensions anti-forestalling rules and restrictions to higher rate tax relief. So the individual should be aware of their potential liability and their responsiblity to report any charge.
It's possible to get pension input amounts from scheme administrators. This is particularly useful for defined benefit schemes. And advisers' help in calculating the excess will be invaluable.
c) If the charge arises because the individual's relevant income was £130,000 or more in 2007/2008 or 2008/2009 how will the Revenue pick up that there should be a special annual allowance charge if the client's relevant income is less than £130,000 in 2009/2010?
This is another good question? It will require the Revenue to look back a thte client's previous two returns. In theory, they should pick this up, but we will have to wait and see how successful they are in practice.
If an individual completes an incorrect tax return, they may incur a penalty and interest will be charged on any underpaid tax. It could result in the client, and possibly their advisers, being liable to prosecution.
