HMRC Pension Investigations

Introduction To HMRC Pension Investigations

With so many other tax planning arrangements now blocked or being attacked, pensions and pension tax planning remain one of the remaining legitimate ways to save tax and with the government desperate to raise more tax revenue, HMRC are closely scrutinising anyone they suspect may have obtained “too much” tax saving from their pension arrangements.

What Could Trigger An HMRC Pension Investigation?

In addition to tax on lump sum pension withdrawals, two particular areas for pensions tax investigation have come to HMRC’s attention recently being errors in claiming tax relief for pension contributions and also claims for pension payments from SIPPs paid overseas without deduction of UK tax under the terms of a double tax treaty.

The main types of error in claiming pension tax relief under HMRC pensions investigation relate to (1) the making of double claims where taxpayer claims higher rate tax relief through their self-assessment tax return when they have already received higher rate relief at source from their employer; (2) claims for higher rate relief when the the taxpayer’s income actually falls below the higher rate band; (3) exaggerated claims for pension contributions; and (4) the claiming of relief by directors in their personal self-assessment tax returns when their company has already made pension contributions on their behalf.

What Is An HMRC Pension Tax Lump Sum Warning?

A good example of HMRC’s hard-edged attitude to pensions tax is HMRC’s pension tax lump sum warning which warns that anyone who withdrew their pension commencement lump sum in the run-up to the Chancellor’s Budget in response to leaked suggestions that she might restrict the maximum tax free amount to £100,000 but who then wished to repay the monies back into their pension pot when the cap did not materialise, using their 30 day cancellation right will still be taxed as though the cancellation had not occurred. This means that the use of the individual’s lump sum allowance and lump sum death benefit allowance for tax cannot be cancelled, even if the right to cancel is exercised and the monies are repaid to the pension provider.

What Are HMRC Pension Drawdown Rules?

Under the Taxation of Pensions Act 2014, flexible pension drawdown was introduced from 6 April 2015. Flexible drawdown permits individuals aged 55 or over (increasing to 57 from 2028) to withdraw any sum from their SIPP at any time instead of having to use their funds to purchase an annuity or be restricted to capped drawdown.

Subject to the individual’s 25% tax free lump sum allowance of up to £268,275, such withdrawals are referred to as flexi-access drawdown and are treated for UK tax as pension income and charged to UK income tax at the rates appropriate to that individual in the tax year of receipt.

What Happens If I Am Overseas And HMRC Is Investigating My Pension?

If you have retired overseas and are subject to an HMRC pension tax investigation it will normally be sensible to co-operate fully especially when you have left your SIPP in place in the UK and are drawing pension payments from it to you overseas.

HMRC will contact you and normally also your SIPP provider and outline the reasons why they are checking your tax position. Even if you have moved your SIPP to a QROPS and have cut all ties with the UK it may still be wise to co-operate given that over 150 countries now have mutual co-operation agreements in relation to tax investigations.

Can HMRC Seize A Pension?

HMRC cannot seize your pension pot directly but they can recover over claimed pension tax relief or other tax debts from your pension payments or by bringing bankruptcy proceedings against you. If you are declared bankrupt, certain protections apply to your pension and normally you cannot be forced to draw down pension monies from your undrawn pension however any pension in drawdown could be taken into account under an income payments order to repay your debts.

If you have made some unusually large pension contributions in the period leading up to your bankruptcy and it appears that you were doing so to defeat your creditors then your trustee in bankruptcy may ask the court to order the repayment of these monies in order to discharge your debts.

Frequently Asked Questions:

What Happens If You Ignore A HMRC Pension Investigation Because You Are Overseas?

You may find that ultimately HMRC proceeds against any UK situated assets that you have retained or obtain a UK court order and then seek to enforce that against you in the courts of the country where you live. You can find out more about overseas pension tax here.

Can Staying In The UK Too Long Trigger A Tax Investigation?

Yes, if your time spent in the UK means that you become a tax resident here then HMRC will expect you to file self-assessment tax returns and pay any tax due.