Calls for reform as thousands more savers caught in pensions tax trap

Calls for reform as thousands more savers caught in pensions tax trap

Industry experts have called for a review of the pensions tax system after the number of savers breaching the annual and lifetime allowances increased again in 2018-19.

Data from HM Revenue and Customs, published this morning (June 30), showed in 2018-19 34,220 taxpayers reported that their pension contributions exceeded their annual allowance via their self assessment forms, with total excess savings of £817m.  

Although this was a drop from the £912m in contributions exceeding the allowance in the previous year, the number of people caught by the annual allowance was up 14 per cent, from 29,910 in 2017-18 to 34,220 in 2018-19. In the previous year it had already risen by 60 per cent.

According to consultants LCP, if a typical tax rate of 40 per cent was assumed, this would generate £326m for the Exchequer - with 4,310 more individuals impacted than a year earlier.  

The average charge per member on this basis would have been £9,549, LCP said.

There are two ways of paying an annual allowance tax charge: via scheme pays through an Accounting for Tax (AFT) return and through an individual’s self-assessment tax return.

The data showed that the value of annual allowance charges reported by schemes via the AFT return in 2018-19 was £209m, a 71 per cent increase on the £122m reported in 2017-18.

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 AA, although this should ease in more recent tax years due to the rise in the tapered annual allowance threshold.”

Lifetime allowance

Meanwhile in 2018-19, 7,130 lifetime allowance charges were reported by schemes through AFT returns. 

The total value of these was £283m, a 6 per cent increase from the £269m the year before.

According to the data, 1,400 people paid a 55 per cent lifetime allowance charge and 5,730 people paid a 25 per cent charge, making up 7,130 cases in total, up slightly on the 7,030 cases a year earlier.

As part of the 2021 Budget, Chancellor Rishi Sunak announced that the lifetime allowance would stay at its current level of £1,073,100 until April 2026, instead of increasing in line with the consumer price index.

Ian Browne, pensions expert at Quilter, called this “an aggressive tax raid on pensions” which will see many more people caught out with large tax bills in the future.

Browne added: “Recent rumours around the lifetime allowance threshold dropping further to £800,000 or £900,000 will mean even more pension savers are caught by the tax charge.

"Pensions by their very nature are a long-term product and it's unfair of the government to constantly move the goal posts."

Karen Goldschmidt, partner at LCP, said the tax system was too complex and needed to be simplified as more people become affected.