Steve Webb, Director of Policy for Royal London, has accused HMRC of ‘living in a parallel universe’ for refusing to understand that people can’t submit information they don’t know they need. But HMRC disagrees.
Higher earners who are members of a defined benefit (DB) pension scheme have been caught in confusing changes that reduce their pension tax relief limits. Currently, when a member of a DB pension scheme builds up rights over the standard annual allowance of £40,000, the scheme has to inform the member of this fact. That information can then be included in the member’s tax return.
Thousands of people might be confused by a change in the system to a tapered annual allowance whereby their allowance is reduced below £40,00 when their total taxable income, including the growth in their pension rights, goes over £150,000. The full annual allowance is reduced if taxable income rises above the £150,000 threshold. The trouble is that their DB schemes won’t know if they’ve earned more than £150,000 and therefore won’t know if their annual allowances have been reduced and therefore will not be in a position to provide the correct information.
Example: Joe earned more than £150,000 a year which reduced his personal annual allowance to £25,000. He has accrued £30,000 in DB rights. Joe will be over his own limit but not know it. As a result, Joe enters zero on his tax return for the question about exceeding the annual allowance but will be in for a nasty shock months, or even years later.
Steve Webb, ex-Minister of Pensions under David Cameron’s coalition government and now Director of Policy, Royal London, wrote to HMRC asking how members of a DB pension scheme were expected to give the right information on their tax returns if they can’t get the correct information from their DB scheme.
But HMRC says that it is up to the individual to comply with the law and make accurate statements on their tax return. And besides, very few people are affected by this change.
Webb said ‘The fact that few people are affected is irrelevant. HMRC is living in a parallel universe where taxpayers perfectly understand the tapered annual allowance and the way that DB accruals are tested against it.’