Tax 

Thousands of savers breach tax allowance protection

Thousands of savers breach tax allowance protection

Thousands of pension savers have breached their lifetime allowance protections in the past 12 years, new data from HM Revenue & Customs has shown.

According to a freedom of information request submitted by AJ Bell, 12,238 individuals notified HMRC they have lost one of the various forms of lifetime allowance protections introduced in 2016.

The lifetime allowance – the limit on the amount of money that can be saved in a pension without triggering a tax charge - currently stands at £1,055,000.

There are four types of protection in place: enhanced protection (2006 at £1.5m), fixed protection (2012 at £1.8m), fixed protection (2014 at £1.5m) and fixed protection (2016 at £1.25m).

This allows the member to protect the allowance from further reductions, but the saver can no longer contribute to their pension or it becomes void.

According to AJ Bell, breaching one of these protections could leave savers facing a tax bill running into hundreds of thousands of pounds.

Tom Selby, senior analyst at the provider, said: "For example, someone with a £1.25m fund who took out fixed protection in 2016 and subsequently lost it in the 2018/19 tax year would face a tax bill of £121,000 on the excess."

The number of breaches reported:

Tax year

Enhanced Protection

Fixed Protection (2012)

Fixed Protection (2014)

Fixed Protection (2016)

2007

2085

N/A

N/A

N/A

2008

1365

N/A

N/A

N/A

2009

1234

N/A

N/A

N/A

2010

875

N/A

N/A

N/A

2011

22

N/A

N/A

N/A

2012

13

888

N/A

N/A

2013

<10

942

N/A

N/A

2014

<10

<10

1066

N/A

2015

<10

<10

894

N/A

2016

<10

<10

<10

N/A

2017

206

191

583

343

2018

162

123

355

316

2019

107

84

165

219

Total*

6069

2228

3063

878

*Totals exclude years where fewer than 10 breaches were reported

Mr Selby noted that while the exact reasons for all of the protection breaches were unknown, about 7,000 have been recorded since the introduction of auto-enrolment.

He added: "It is likely a significant proportion of these people accidentally broke the terms of their protection by failing to opt-out of their workplace scheme, either initially or at their re-enrolment date three years later. For these people the massive resulting tax bill will be a bitter pill to swallow."

In a recent First-tier Tribunal ruling, the judge decided a man who had accidentally voided his lifetime allowance fixed protection by failing to cancel a contribution standing order should have the protection reinstated.

Mr Selby said: "If HMRC is unable to get the ruling overturned at appeal, it may mean thousands of pension savers who have had their protection certificate revoked are knocking on its door asking for their money back."

Mr Selby added that a review of the current pension tax regime was needed as the inherent complexity of the pensions system was causing problems for higher earners.

He said the government should consider "simpler alternatives which don’t unnecessarily hamper those doing the right thing and saving for retirement".

He added: "One option would be to create separate tax regimes, with defined benefit schemes controlled by a lifetime allowance and defined contribution by a single annual allowance. This would allow the Treasury to keep a lid on costs and in the process remove huge complexity from the system.

"The annual allowance taper and money purchase annual allowance could then be scrapped altogether, radically simplifying the system in the process."

Paul Gibson, managing director at Granite Financial Planning, said: "The LTA breach numbers seem high but are not entirely surprising as the complexity of the UK pension system continues to beggar belief.