Taxpayers at higher rates are advised that they might need to file tax returns, even if employed. They are missing tax relief for their pension.

The 31 January deadline for self-assessment is fast approaching. Higher earning workers should now be conscious of possible penalties for failing to file.  

Tax may be due on pension savings of higher and more-rate taxpayers if the amount they put aside exceeds their annual or lifetime limits. 

Meanwhile, those who choose not to claim child benefit to avoid incurring charges – and filing a tax return – could be missing out on national insurance credits that count towards their state pension. 

This is Money describes when high-earners may have to file a return tax to avoid potential pension pitfalls.

Higher-rate taxpayers who are employed might still file a tax return to avoid pension pitfalls

For those who have higher incomes, but are still employed, it is possible to file a tax return and avoid the pitfalls of pension planning

Pension savings are 40% less for higher rate earners 

As an incentive for saving money, the Government will increase pensions. This means your pension provider may claim back HMRC tax and include it in your pension pot.  

Basic rate taxpayers receive a 20% tax reduction in England, Wales, Northern Ireland. This will be automatically claimed by their pension provider.

Tax relief of 40% is available to higher-rate tax payers.

Tax relief of up to 45 percent is possible for additional rate taxpayers, whose contribution levels are lower but still available. 

Their pension provider automatically claims the 20% tax relief, which is a 25% increase to the money they have contributed to the position. However, the individual may be required to file a tax return to get the higher rate relief.   

You can still claim tax relief for an unclaimed tax year up to four years from the date you claimed it. 

This money will not be paid into your pension. It will instead be paid to you via a tax rebate, reduction of your current tax bill or modification in your tax code so you pay less tax in the next year.  

“HMRC will not tell you whether it believes you should fill out a tax return. It is best to contact them immediately to ensure you have all the information you need, Helen Morrissey senior retirement analyst at Hargreaves Lansdown.

“The additional money you have can really impact what you get in retirement,” she says.   

Do you have a breach of the annual or lifetime allowance? 

The amount of money that a person can put into their retirement account before they start to pay tax on it is limited by both lifetime and annual limits. HMRC may recoup some of your savings if they exceed them.

The statement will be sent by your pension provider if you have exceeded the annual allowance. If not, you can let HMRC know through a tax return. 

If you are a high earner or have accessed your pension, your annual allowance will be lower

Your annual allowance may be reduced if you earn a lot or have taken out a pension.

Most people can contribute up to £40,000 a year to their pension without breaching the allowance. 

Your annual allowance may be reduced if your income is high or you have accessed your retirement savings. 

If you start drawing an income from your pension, you will trigger the ‘money purchase annual allowance’ which means your annual tax-free allowance is slashed to just £4,000. 

If you have an adjusted income of more than £240,000 and a threshold income of more than £200,000, you will fall foul of the tapered annual allowance, which can reduce the amount you can save tax-free to as low as £4,000.

On the Government Website, you can calculate your annual reduced allowance.  

Morrissey said, “If you have more than one pension you will need to get them to sign a joint statement. This is so you know you’re not in violation of the allowance.”

You or your pension provider will have to pay the tax. HMRC will be notified about this charge if you fill in the section “Pension savings tax charges” on your tax return.

The current lifetime allowance is £1,073,100, with anything above this subject to a tax charge. 

This amount is paid usually by the scheme administrator out of the pension pot rather than by the individual.

You can claim child benefits to get pension credits 

If you or your partner earn more than £50,000 and claim child benefit, you will be liable for the High-Income Child Benefit Charge (HICBC).  

By filling out a Self-Assessment, the taxpayer with the highest income will be responsible for the tax. 

Couples with a combined income of up to £100,000 do not have to pay the charge, as long as neither partner has an individual income of more than £50,000. 

Many higher-earning earners opt not to be eligible for child benefits because of the cost and avoid having to file a tax return. 

For those earning £60,000 or more, the charges will equal the entire amount of the child benefit.  

But parents who do not claim will be denied access to national insurance credits, which can count towards their state-funded pension.

If you or your partner earn more than £50,000 and claim child benefit, you will be liable for the High-Income Child Benefit tax charge (HICBC)

If you or your partner earn more than £50,000 and claim child benefit, you will be liable for the High-Income Child Benefit tax charge (HICBC)

Morrisey explains: ‘The charges increase gradually depending on how much you earn, and for those earning £60,000 it equals the total amount of the child benefit. 

“This caused many to choose not to claim the child benefit as they were required to pay it back through tax returns. You will lose out on National Insurance credits, which count toward your state pension, if you don’t claim child benefit. 

‘You also have the option to sign up for child benefit but opt not to receive it, so you don’t have to pay the charge.’

Steve Webb was a former Pensions Minister.

He stated that the High Income Child Benefit Charge was a complex piece of legislation, which can be confusing to many who may not believe it might apply to them.

“It depends on people knowing their partner’s financial situation as well as asking people who have not yet filed a tax return for the first time to begin to do so.    

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