The tax collected from individuals breaching the Lifetime Allowance has increased by 1068 per cent in the past decade, according to analysis of HMRC data by Mazars.
In the tax year ending 2010/11, HMRC collected £32mn from people breaching the LTA but this surged to £342mn in the tax year ending 2019/20.
On average, £40,188 was paid in tax charges by individuals that broke the LTA threshold in 2019/20.
Mazars said the reason behind the increase was more individuals being caught out by the tax.
In the past decade the number of people with pension savings over the LTA threshold, increased 956 per cent, from 890 to 8,510, the firm found.
It said this had been fuelled by continuous cuts to the maximum amount people are able to save into a pension before facing higher tax charges.
The LTA threshold had dropped from £1.8mn in 2010/11 to £1.055mn in 2019/20, before seeing a small increase for the 2020/21 tax year to £1,073mn.
However, in the June Budget, the Chancellor announced that the LTA would be frozen until April 2026 at its current rate.
Ian Pickford, partner at Mazars, said: “Thousands of people have been dragged into paying additional tax on their pension savings in the last decade.
"With the Lifetime Allowance threshold on ice until 2026, this upward trend won’t slow down, hitting both defined benefit and defined contribution pension savers, especially those with generous pension perks. It’s closer than many people think."
He said freezing the cap was effectively a "punishment on saving into a pension".
Pickford said people should weigh up the benefits of continuing to contribute to a pension against other ways of saving for later life.
“Increasingly, we are seeing people turn their backs on pensions as a means of income provision in later life, opting to use them as a way to pass down wealth,” he said.
“All the time your money is in a pension, it is growing free of income and CGT and for those lucky enough to have built up other savings, it’s likely a pension will be the last pot to access.”
A HM Treasury spokesperson said overall, 92 per cent of individuals currently approaching retirement have a pension pot worth less than the lifetime allowance, so will not face a lifetime allowance charge, while the median pension pot for individuals approaching retirement was around £150,000.
The spokesperson said: “Maintaining the lifetime allowance at its current level allows savers to continue to make significant amounts of pension savings tax-free."
sonia.rach@ft.com
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