Under the Radar – the Relevant UK Earnings Tax Charge

Under UK law, pension contributions are an attractive and tax efficient way of saving for one’s retirement. However, there are several restrictions which apply to effectively cap the amount of tax relief one can obtain.

Restrictions to Pension Contributions

There are three main restrictions that can apply to pension contributions. These are known as the:

  1. Relevant UK earnings restriction
  2. Annual allowance restriction
  3. Lifetime allowance restriction

Annual Allowance Restriction

If one’s contributions exceed the annual allowance (£40,000 as standard for the 2022/23 tax year), a ‘pension savings tax charge’ will be added to their tax liability. This is a charge at the individual’s highest marginal rate of tax (20%, 40% or 45% as applicable), on the excess contributions above the annual allowance.

When self-assessing, the excess above the annual allowance is reported on Form SA101 ‘Additional information’, page Ai 4, box 10.

Lifetime Allowance Restriction

If total contributions over one’s lifetime exceed the lifetime allowance (£1,073,100 for the 2022/23 tax year), then a further lifetime allowance charge will apply once the pension starts to be drawn (or at age 75, for any pensions which remain undrawn).

When self-assessing, the excess above the lifetime allowance is reported on Form SA101 ‘Additional information’, page Ai 4, boxes 7 or 8 (as applicable).

Relevant UK Earnings Restriction

However, less commonly understood is the effect of contributions exceeding one’s relevant UK earnings. Where this happens, a separate tax charge will apply unless the individual takes steps to rectify the problem.

Types of Pension Contribution

Before considering the tax implications of exceeding one’s relevant UK earnings, it is worth taking a step back and revisiting the different ways pension contribution can be made, as the relevant UK earnings restriction only applies to one type of contribution.

Broadly, there are three main methods by which pension contributions can be made:

  1. via relief at source (“RAS”), or
  2. via net pay arrangement (“NPA”), or
  3. an employer can contribute on behalf of an employee (“employer contribution”)

Both RAS and NPA contributions are ‘member’ contributions, meaning they’re treated as having been made by the individual to whom the pension belongs.

This is opposed to employer contributions, which as the name would suggest, are treated as being made by one’s employer.

One’s ‘relevant UK earnings’ only need be considered where one is making RAS contributions during the pension input period (currently the pension input period is equivalent to a tax year; i.e. the 6 April to the following 5 April).

What is a RAS contribution?

A RAS pension contribution is effectively one made from an individual’s post-tax earnings. This is opposed to a NPA contribution, which is made from pre-tax earnings, or an employer contribution which is not made from the employee’s earnings at all. The latter two types of contribution can generally only be made by employers on and employee’s behalf where that employee is a member of the employer’s pension scheme, whereas a RAS contribution can be made by anybody (e.g. into their employer’s pension scheme, or into their own private pension).

Tax Relief on RAS Contributions

An individual making RAS contributions is entitled to basic rate tax relief via a ‘top-up’ to his pension pot. The ‘pension scheme administrator’, who is the person appointed to manage the pension scheme, will claim the top-up from HMRC on the member’s behalf.

The amount of the top-up claimed by the scheme administrator will equal 20% of the gross contribution. To calculate the gross contribution, you should multiply the net contribution by the fraction 100/80. However, under UK law, tax relief on gross RAS contributions is limited to the higher of either:

  1. £3,600, or
  2. One’s ‘relevant UK earnings’

Henceforth, the higher of these two amounts shall be referred to as the “RAS threshold”.

The effect of these rules is that the amount of RAS pension contributions that attract tax relief, is capped by the RAS threshold.

Example 1:

Mr Walker has a gross annual salary of £60,000 from his employment. That is his only source of income; hence he has relevant UK earnings of £60,000. He makes a RAS contribution of £10,000 to his private pension (£10,000 being his ‘net’ contribution, the amount actually paid by him). The pension scheme administrator then claims a tax relief from HMRC of £2,500 (£10,000 x 100/80). The total or ‘gross’ contribution is therefore £12,500 (£10,000 plus £2,500).

The £2,500 top-up is 20% of the gross contribution of £12,500; hence tax relief at the basic rate of 20% has been obtained by Mr Walker.

What are ‘Relevant UK Earnings’?

A full list of what are defined as ‘relevant UK earnings’ can be found at Finance Act 2004, s189 but most commonly these are:

  • Gross earnings from employment
  • Net profits from self-employment
  • Net profits from a Furnished Holiday Letting (FHL) business

The sum of the above amounts in a tax year will form one’s relevant UK earnings for that year.

It is important to note that income such as interest, dividends, pensions and profits from an ordinary letting business do not count as ‘relevant UK earnings’.

Why is it possible to exceed the RAS threshold?

Before a member of a registered pension scheme makes their first RAS contribution, under Regulation 5, The Registered Pension Schemes (Relief at Source) Regulations 2005, SI 2005/3448, the pension scheme administrator must ask the member to sign a declaration stating words to the effect:

“The ‘total’ contributions to any registered pension scheme in respect of which I am entitled to receive tax relief, will not exceed the higher of the basic amount or my relevant UK earnings.”

It is by signing such a declaration that the member promises not the contribute more to his pension scheme in any given tax year than the RAS threshold. In reality of course, this is rarely considered by a layman making contributions, and is rather concerningly often overlooked by professionals too. Therefore, all too commonly the amount of RAS contributions one makes will inadvertently exceed the RAS threshold, simply because nobody has thought to check!

What should one do if their RAS contributions exceed the RAS threshold?

One should notify their pension scheme administrator as soon as possible. Once aware of the issue, not taking action to rectify it may amount to tax evasion which is a criminal offence.

Per PTM044220, when the pension scheme administrator discovers they have claimed excess tax relief:

  • For interim claims (claims made during the pension input period), they have 90 to repay the amount to HMRC, or
  • For annual claims (made at the end of the pension input period), they must amend the claim and repay the excess to HMRC immediately

Tax Implications of Exceeding the RAS threshold

So, what happens if the amount of RAS pension contributions one makes exceed the RAS threshold during the tax year?

The answer depends on what the member and pension scheme administrator do when they become aware of the problem, and crucially, when they do it. Broadly, for any RAS contribution in excess of the RAS threshold for a tax year, a member can be in any of the following scenarios:

Excess Net Contribution (Repayable to the member) Excess Top-Up (Repayable to HMRC)
Repaid before the tax return is filed The member’s excess net contribution does not count toward their annual or lifetime allowance.   No tax charge arises on the taxpayer.
Repaid after tax return is filed If the self-assessment tax return is submitted before the net contribution is repaid to the member, it will be included when testing the annual and lifetime allowances thresholds for that year. One has up to 6 years from the end of the tax year in which he made the excess contribution for a repayment of that excess to be made to him. Once repaid, a tax return amendment or claim for overpayment relief may be required.   If the self-assessment tax return is submitted before the excess relief is repaid, a tax charge will arise on the taxpayer equal to excess relief. This is added to one’s tax liability for the tax year. Once repaid, a tax return amendment or claim for overpayment relief may be required.
Not repaid The net contribution will remain part of the member’s pension pot, using up both their annual allowance and lifetime allowance, despite the contribution not attracting any tax relief.   This should never occur. Whomever discovers the excess tax relief first, be it the member or pension scheme administrator, has a legal responsibility to ensure the excess is repaid to HMRC.  

However, it is worth noting that while the excess top-up must be repaid to HMRC in all circumstances, the excess net contribution doesn’t necessarily have to be repaid to the member; that is optional, and usually at the discretion of the pension scheme administrator.

Excess relief repaid before the Self-Assessment Tax Return is filed

Where the excess tax relief is repaid to HMRC by the scheme administrator before the member’s Self-Assessment Tax Return is filed, the taxpayer will not have to report it.

Excess relief is repaid after the Self-Assessment Tax Return is filed

If the excess tax relief is repaid to HMRC after the Self-Assessment Tax Return is filed, Finance Act 2004, s192B provides that a tax charge will arise on the member.

The excess is treated as an additional amount of tax due under Step 7 ITA 2007, s23. It is added to the tax liability of the member at the same stage as other common Step 7 charges; e.g. the High-Income Child Benefit Charge (HICBC) and Pension Savings Tax Charge (where the annual allowance is exceeded).

Note also, that the increase to the basic rate and higher rate thresholds are restricted to the RAS threshold.

One can also request that a repayment of their contribution (the 80% net amount) be refunded to them by the scheme administrator under sections 188(2) and 190, and Paragraph 6 Schedule 29 Finance Act 2004. This must take place within 6 years of the end of the tax year in which the excess contributions were made. If the amount is repaid to the member after 6 years, the payment will be treated as unauthorised payment from the pension scheme. See the paragraph called ‘Refund of excess contributions lump sum’ at PTM045000 for further details.

Equally, a taxpayer can leave the net contribution in the pot, although this would disadvantageous as it would still count toward their annual and lifetime allowance for pension contributions (PTM053200 and PTM045000).

Thus, although very unlikely, it is theoretically possible that a charge under s192B FA 2004, a pension savings tax charge, and a lifetime allowance excess charge could all occur in the same tax year!

Reporting Excess Relief on the Self-Assessment Tax Return

If the excess relief on the RAS contribution is not repaid to HMRC by the pension scheme administrator before the member’s Self-Assessment Tax Return is filed, then a charge to tax under s192B FA 2004 will arise on the member.

HMRC’s SA110 ‘Tax calculation summary notes’ for the tax year ended 5 April 2022, details at Section 9 the Step 7, s23 charges to be included within an individual’s tax liability. However, the s192B tax charge is not listed. Similarly, the proforma ‘Tax and National Insurance contributions calculation version E – version 2.1.1’ document provided to tax Software Developers for the 2022/23 does not include provision for a tax charge under s192B either.

In fact, at the time of writing, there is no provision at all for such a charge to be reported on the Self-Assessment Tax Return. This is a rather baffling oversight, as it is not uncommon for such charges to arise. E.g. where an agent is preparing their client’s tax return in January, prior to the filing deadline, and discovers that a taxpayer’s RAS contributions have exceeded their RAS threshold, there may not be time for the pension scheme administrator to repay the excess relief to HMRC before the return needs to be submitted.

So how does one report it if they are legally required to? We would recommend doing the following:

  • including the charge at Step 7 of the tax computation on the SA302 tax computation per s23 ITA 2007
  • including the s192B tax charge within the total tax liability for the year in box 1 of page TC 1 form SA110; and
  • include a whitespace note in
    • box 19 of page TR 7 form SA100; and
    • box 17 of page TC 2 form SA110

detailing the amount of tax chargeable under s192B, FA 2004 and including a brief explanation that the charge cannot be reported on any box prescribed by the Self-Assessment forms.

Where one is using third-party tax software to prepare the tax return, we would suggest taking the same steps as above, but seek technical assistance from your software provider should face difficulty in achieving the above results within the constraints of the software. As a last resort, a paper return can always be prepared instead.

VTFP in Partnership with Claritas

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