The number of savers hit by pension tax charges is on the up, with £812m in contributions exceeding the annual allowance limit in 2017/18, according to official data.
Data from HM Revenue & Customs, published today (September 26), showed that in 2017/18 26,550 individuals in their self-assessment tax return reported pension contributions exceeding the annual allowance to the tune of £812m, up from £578m in 2016/17, and amounting to an average of £30,584 per person.
The number of people reporting such a breach was up 11,000 per cent in a decade as just ten years ago a mere 230 people faced the tax charge.
Those affected face a potential tax charge of 40-45 per cent on their savings if they fall in the higher income brackets.
There are two ways of paying this tax. One is via scheme pays where the individuals can ask the pension scheme to pay the charge on their behalf with a corresponding reduction in benefits. The other is through an individual’s self-assessment tax return.
The total value of annual allowance tax charges paid by schemes increased from £104m in 2016/17 to £173m in 2017/18.
There are three different annual allowances depending on the individual’s level of income.
The standard annual allowance, which is currently £40,000 a year; the tapered annual allowance, which gradually reduces the allowance for those on high incomes, meaning that for every £2 of adjusted income above £150,000 a year £1 of annual allowance will be lost; and the money purchase annual allowance which is £4,000 a year.
This applies to those who have ‘flexibly accessed’ their benefits, for example by taking a taxable income from flexi-access drawdown.
The HMRC data is not broken down to show how much was raised as a result of breaching the standard annual allowance, and how much was down to the tapered annual allowance or money purchase annual allowance.
But industry experts have blamed the significant increase in the number of annual allowance breaches on the introduction of the tapered annual allowance in 2016.
Tom Selby, senior analyst at AJ Bell, said: “The staggering impact of the Treasury’s pension tax grab have been laid bare by today’s figures.
“Twice as many people were clobbered with an annual allowance charge in 2017/18 compared with the previous tax year, with hundreds of millions snatched from the grasp of hard-working savers.
“The culprits behind this spike in pension tax are almost certainly the taper, which lowers the annual allowance for high earners, and the money purchase annual allowance, which penalises those who take taxable income from their retirement pot.”
Andrew Tully, technical director at Canada Life, said: “Even something which sounds as simple as an annual allowance is complicated by the fact we have three different limits – a standard allowance, a very low allowance for those who have flexibly accessed their benefits, and a fiendishly complicated position which reduces the limit for higher earners.
"This complexity means many individuals may be unintentionally caught by the annual allowance.