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Pensions and your self-assessment tax return – what you need to know

Self-employed or a high earner? Here are our top tips to help reduce your tax bill before the 31 January self-assessment deadline.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

If you work for yourself or you’re a high earner, you could miss out on vital tax benefits if you don’t include certain pension details on your tax return. There are other pension pitfalls for high earners too. In some cases, you could give up National Insurance credits that count towards your State Pension.

Here’s how.

We hope you find this article helpful, but it isn’t personal advice. Pension and tax rules can change, and any benefits depend on your circumstances. Pensions are meant for retirement so you can't normally access your money until age 55 (rising to 57 from 2028). If you’re not sure what’s right for you, ask for financial advice.

How can adding money to my pension reduce my tax bill?

If you’re resident in the UK for tax purposes and under 75, you can receive tax relief on pension contributions. You’ll automatically get basic-rate tax relief (currently 20%) paid into your pension by the government. However, if you pay tax at a higher rate, you could claim back up to a further 25% (or 26% for Scottish taxpayers). But to claim it you’ll need to declare your pension contributions on your tax return.

When you complete your tax return this year, make sure you include the pension contributions you made in the 2020/21 tax year (6 April 2020 to 5 April 2021). If you pay tax at a higher rate, it could go some way in helping reduce your tax bill.

Any additional tax relief will be paid directly to you, by adjusting your tax code or by reducing your tax bill.

How much can I pay into a pension and get tax relief on?

You can get tax relief on personal pension contributions up to 100% of your earnings, or £3,600 if this is more.

Your pension contributions are also limited by the annual allowance, which is currently £40,000 each tax year for most people.

Your personal limit might be higher or lower depending on your circumstances. For example, if you’re a high earner with ‘adjusted income’ of over £240,000 your annual allowance could be as little as £4,000.

Read more about tax relief

How to add your pension contributions to your tax return

In the 'Tax reliefs' section of your tax return, under 'Payments to registered pension schemes where basic-rate tax relief will be claimed by your pension provider', include the total gross value of your personal pension contributions.

Even if you forgot to include these details, and you completed your tax return online, you can still log back in and make changes before the 31 January deadline.

Haven’t got a pension?

If you’re happy making your own investment decisions, you could think about opening an HL Self-Invested Personal Pension (SIPP). Lots of people who work for themselves or are high earners use private pensions like a SIPP because of the wide investment choice, and the control they offer, compared to other options.

If you’d like to learn more, download one of our SIPP guides below.

Investments can go up as well as down in value, so you could get back less than you invest.

DOWNLOAD SELF-EMPLOYED SIPP GUIDE

DOWNLOAD SIPP GUIDE

The high-income child benefit tax charge and State Pension

If you earn over £50,000 and you or your partner have registered for and claim child benefit, you’ll be liable for the high-income child benefit tax charge. This would need to be paid through your self-assessment.

The charge increases gradually depending on how much you earn. For those earning £60,000 or more, it equals the total amount of the child benefit. This means lots of people choose not to claim child benefit because they have to repay it through their tax return.

However, by not claiming, you or your partner might miss out on National Insurance credits that count towards your State Pension.

There’s the option to register for child benefit but opt to not receive it. That way you don’t have to pay the tax charge but can still benefit from National Insurance credits.

What if I can’t afford to pay my tax bill on time?

Usually if you file your tax return late or make a late payment, you’ll face a penalty. But this year HMRC is waiving the late penalties for one month. This means you have extra time to complete your 2020/21 tax return and pay any tax due.

The deadline to file and pay is still 31 January 2022, but the penalty waivers mean:

  • If you can’t file your return by the 31 January deadline, you won’t receive a late filing penalty if you file online by 28 February.
  • If you can’t pay your self-assessment tax by the 31 January deadline, you won’t receive a late payment penalty if you pay your tax in full, or set up a time to pay arrangement, by 1 April.

Remember though, any interest due will still be from 1 February 2022.

Help for if you think you'll miss the tax return deadline

Help cut next January's tax bill today – plus cash prize draw available. Terms apply.

Your tax return is for the previous tax year, so if you make a pension contribution this tax year (2021/22) it could reduce next year’s bill. And if you top up an HL SIPP by 23 February, you’ll be entered into our cash prize draw. Total new payments of £100 or more made to an HL SIPP between 1 December 2021 and 23 February 2022 will count towards your potential cash prize. There will be seven winners of up to £3,000 each.

FULL TERMS APPLY

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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