You can lead a horse to water…
As we approach the end of the tax year, advisers’ attentions are drawn to maximising clients’ ISA and pension contributions. For many it is a manic time of the year, with additional stresses of getting clients to do their part to meet the tight deadlines. However, one issue that can be overlooked at this time of year is the question as to whether or not their clients have taken the appropriate steps to claim higher or additional tax relief on pension contributions where they have made net contributions to a personal pension.
As we all know the 20% basic tax relief is claimed by personal pension providers automatically upon receipt of net personal contributions. For basic rate taxpayers, as no further tax relief will be due on the pension contributions, they don’t need to take any further action. On the other hand, for individuals who are a higher rate or additional rate taxpayers, and for those resident in Scotland who pay tax at the intermediate, higher or top rate, they will need to advise HMRC in order to claim any tax relief due, above the basic rate.
For those who are required to do a tax return they simply need to provide details of their pension contributions in the appropriate section. If the individual has no requirement to complete a tax return then phoning or writing to HMRC may be sufficient. All pretty straightforward you would think, but as the proverb says “you can lead a horse to water but you can’t make it drink”, and so it is for getting clients to ensure that they do their part.
There is no doubt that checking that your client is claiming tax relief as part of your review process would be wise. That said how best is it to check that they have taken the appropriate action and claimed the correct amount?
In my view, a good way to check that the correct tax relief has been given is by looking at the client’s tax code notice, which HMRC produces annually. This gives a breakdown of how the individual’s tax code is calculated. So for example, where a higher rate taxpayer makes a net contribution of £6,000 pa the pension provider will claim the basic rate tax of £1,500 back from HMRC. The further higher rate tax relief of £1,500, if claimed back through the individual notice of coding, will show as an addition of £3,750 to their personal allowance (£3,750 x 40% = £1,500). If no provision has been made, or the amount added to the personal allowance is incorrect, then it is important that HMRC is notified of this.
The good news is that if a client has omitted to claim tax relief all is not lost, but there are time limits so failure to act promptly could prove costly.
An individual has a twelve month window to amend their tax return. This means that for the tax return for 2018/19, which is due to be filed on 31 January 2020 at the latest, the individual has until 31 January 2021 to amend it.
For tax returns which can no longer be amended as the 12 month window has elapsed, the client can submit an overpayment relief claim. The deadline for making the claim is four years from the end of the relevant tax year. This means that, until 5 April 2019, it will be possible to claim the tax relief for: 2014/15, 2015/16, 2016/17 and 2017/18. An overpayment relief claim must be submitted in writing to HMRC, and further guidance, including the information which must be included to make a valid claim, can be found on HMRC’s website. It is also worth mentioning that a small amount of interest may also be due on any tax refund.
Grabbing the reigns on this topic and making your clients aware of these time limits may just be enough to quench the tax relief thirst.
This article first appeared on Professional Adviser