Pension allowance breaches revealed

“This is a complicated area of pension planning and it is all too easy to get caught out, so anyone concerned about these limits should consult a professional financial adviser.”

HMRC's data also showed the total tax take from the lifetime allowance tax charge increased from £13m in 2006/07 to £185m in 2017/18, with most of the increase having taken place since 2012 when the government started to cut the lifetime allowance.

However, not as many people were impacted by the lifetime allowance compared to the annual allowance as only 4,550 paid tax charges.

After being introduced in April 2006 at £1.5m, the lifetime allowance grew to £1.8m in 2012 but was then cut to £1m. Since then it has edged up in line with inflation to the current £1.055m.

Mr Tully said: “The numbers paint a stark picture of how the lifetime allowance has impacted savers. There is an obvious link to make between the increase in the tax receipts and the slashing of the lifetime allowance since 2012. 

“It seems clear the government’s tax take from the lifetime allowance will continue to grow substantially over the coming years.”

He also called for the allowance to be scrapped to remove the complexity surrounding pensions legislation.

Mr Tully added: "The lifetime allowance is an arbitrary tax which penalises individuals who have enjoyed good returns on their investments.

"There is also a significant disparity in the way benefits are measured against the lifetime allowance depending on whether the individual is a member of a defined benefit or defined contribution scheme.

"With a relatively low cap on contributions to pensions of £40,000 a year, and less for higher earners, the government should consider scrapping the lifetime allowance.

"This would massively simplify pensions for schemes, providers and, most importantly, customers, by removing a huge amount of complexity around areas such as benefit crystallisation events.”

Tim Holmes, managing director at Salisbury House Wealth, flagged it was not necessarily the more affluent who were hit by this tax but also people who may be unaware of the limits.

Mr Holmes said: “The number of individuals being hit by this very punitive tax for trying to save into a pension is growing rapidly. This cannot go on.

“It’s not the super-rich that are being hurt by this tax. A lot of middle England that do not see themselves as affluent are getting hit by breaching both annual and lifetime limits.

“When the government started cutting the lifetime allowance limit I’m not sure they realised what problems they were going to cause. Now the problems are clear, it is time to move to wholesale reform."

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