By Mark Fairlie
HMRC have “finally” removed a calculator from their website which gave taxpayers the wrong information about how much they could pay into their pension.
The decision was taken after two weeks of growing pressure from accounting and tax consultancy firms. In addition to criticism over the erroneous results the calculator produced, HMRC has been criticised over the length of time it took to withdraw the tool from their website.
Pensions remain the favourite way for Britons who are saving for their retirement. Up to a ceiling, Britons can pay money from their earnings directly into their pension pot without having to pay tax or National Insurance on their contributions.
Most taxpayers are allowed to add up to £40,000 a year tax-free to their pension pot up to a lifetime maximum of £1,000,000.
For those earning £150,000 a year or more, the rules were changed in the 2016/17 tax year when HMRC introduced a new system called “taper relief”. Someone earning £150,000 still could transfer £40,000 a year maximum into their pension while qualifying for tax relief but for every £2 they earned over that limit, their annual allowance of £40,000 reduced by £1.
For anyone with earnings of £210,000 a year or more, the annual allowance reduced to £10,000.
The carryover allowance
Under the current system, taxpayers are allowed to carry over their allowance for three years if they don’t use it all.
For example, someone may have paid £20,000 into their pension in tax year 2015/2016 meaning that £20,000 of their annual allowance was unused and could be carried forward to this tax year.
Online calculator miscalculated the carryover allowance
The problem with HMRC’s online calculator was that it gave many people who used it the wrong information.
As reported in Moneywise magazine, one user was told that their contribution allowance was £10,000 when they could have actually added £35,000 to their pension.
An HMRC spokesman told the Telegraph that they were “sorry that the calculator isn’t working as it should in some cases. The calculator is no longer available as it is being updated.”
Steve Webb, former pensions minister now director of policy for Royal London, described that situation as “totally unacceptable” and that it should have been taken down sooner because it contained “blunders of this sort”, according to City AM.
Speaking in the same article, Charlie Musson from pension provider AJ Bell worried about whether high earners would be able to work out how much they could put into their pension “if the HMRC website can’t get the answer right”. He believes that mistakes like these “undermine (HMRC)’s legitimacy” because “they knew the calculator was wrong but still left it up.”
Mr Musson believes that the taper relief is a particularly complicated aspect of the UK pension system. Others agree. Nathan Long, speaking to Professional Advisor, described taper relief as “fiendishly complex” and the Financial Times quoted pension experts as describing it as “horrific” and “nightmarish”.
Where to find the correct information
Following the removal of the online calculator, HMRC is advising taxpayers to use this guidance on their website for more information.