Pensions annual allowance – how to pay tax above limit
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The pensions annual allowance is currently £40,000 a year and is set to go up to £60,000 a year, as announced in today’s Spring Budget. The Government is also scrapping the pensions lifetime allowance, the maximum a person can set aside for their pensions over the course of their life.
If a person goes above the annual allowance they should get a statement from the pension provider about this.
Those in more than one pension scheme will need to ask each pension provider for a statement to work out if they have gone over the limit.
The Government website also has an online calculator a person can use to work out if they have gone above the allowance.
A person can use the tool if they are signed up to a UK-registered pension scheme or if they are part of a qualifying overseas pension scheme.
They will need to provide details of what types of pension schemes they have been part of and how much they have saved in their schemes for the dates they want to check.
A person who goes over the annual allowance will either have to pay the tax themselves or get their pension provider to pay the bill.
The individual will need to complete the ‘Pension savings tax charges’ section of the Self Assessment tax return to tell HMRC about the tax they need to pay.
A person needs to fill this in even if the pension provider pays all or part of the amount. People can still get tax relief on their contributions on their tax return if they are above the annual allowance.
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Chancellor Jeremy Hunt has also scrapped the pensions lifetime allowance, which is currently £1,073,100.
Ministers have brought in the new policies in efforts to encourage Britons back into work as they can save more of their income into pensions and avoid paying tax.
Stuart Lee, chief executive of Rest Less, warned the changes could have little effect. He said: “Trying to encourage large numbers of economically inactive over 50s back to the workplace with tax incentives for those with more than £1million in their pension, or who are saving more than £40,000 a year in their pension is like rearranging the deck chairs on the sinking Titanic – it’s absolutely pointless.
“For the majority of people, the reason they left the workplace is not due to a lack of tax incentives on their pension, but rather a lack of access to relevant and flexible work which can fit around the sometimes complex and myriad other responsibilities faced by this demographic.
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“The Government would do far better helping to challenge outdated ageist stereotypes and incentivising businesses to hire midlife employees and build large scale attraction, retraining and retention programmes for more experienced workers.”
Figures from consultancy group LCP suggest 1.3 million pension savers have already breached the lifetime allowance.
Those concerned they may go above the allowances may want to check they are on track to receive the full state pension, as this does not count towards the allowance.
A person typically needs 30 years of contributions to get the full basic state pension, which is currently £141.85 a week, and 35 years of contributions to receive the full new state pension, which is £185.15 a week.
State pension payments are increasing by 10.1 percent next month, with the full basic state pension going up to £156.20 a week while the new state pension is increasing to £203.85 a week.
An individual can voluntarily pay National Insurance contributions and increase their state pension, which can majorly boost their payments over the course of their retirement.
People can usually pay contributions up to six years ago but people can currently pay back another 10 years, as far back as 2006.
This opportunity only lasts until the end of the tax year, after which people will only be able to top up their contributions up to six years ago.
A person can check how much state pension they are on track to receive by using the state pension forecast tool on the Government website.
The tool will also tell the user if they can top up their contributions and if they are eligible to claim Pension Credit, which tops up the income of people of state pension age who are on low incomes.
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