Pensions allowance tax charges hit record high

Pensions allowance tax charges hit record high

The number of savers breaching annual and lifetime allowance limits reached new records in 2019-20, according to figures from HM Revenue & Customs.

The personal and stakeholder pension statistics, published yesterday (March 23), showed a 24 per cent rise in the number of taxpayers reporting pension contributions exceeding their annual allowance through self-assessment, reaching a new record of 42,350 individuals between April 6 2019 to April 5 2020. In the previous period, 34,260 savers had reported AA breaches.

The total value of contributions reported as exceeding the AA stood at £950mn in 2019-20, a 16 per cent hike when compared with £819mn registered in the previous year.

The figures of tax charges on lifetime allowance also reached new records, with 8,510 reports through accounting for tax returns in 2019-20. This represents a 19 per cent increase when compared with the previous period, when 7,130 charges were received.

The total value of LTA charges reported by schemes stood at £342mn in 2019-20. This is a 21 per cent increase from £283mn in the previous period.

According to Ian Browne, pensions expert at Quilter, the figures show the UK’s “highly complex tax system is catching an increasing number of people out, as AA and LTA charges begin to soar”.

“This is likely to get even more pronounced in future data sets due to the various frozen allowances announced at the last budget,” he noted.

The AA, which stands at £40,000, has been unaltered since 2014-15, while the LTA, which is normally uprated with inflation annually, has been frozen at £1,073,100 per year in April 2021 until 2025-26.

Browne said: “While auto-enrolment has been a very successful step in the right direction, it’s important that the highly complex rules around the AA and LTA don’t hamper the good work the policy has done.

“These rules require an intricate knowledge of the UK’s pension landscape to understand and therefore time and time again catch people out.”

Overall, HMRC stats revealed that savers made pension contributions worth £31.3bn in 2019-20, up from £27.9bn in the previous period.

After years of hikes in the number of members contributing into a pension scheme due to the introduction of auto-enrolment, this figure has remained constant at 9.4mn in 2018 to 2019 and in 2019 to 2020.

Browne noted: “This really shows that pre-pandemic the public was starting to understand the need to start prioritising saving for retirement as the state pension alone is unlikely to come anywhere close to providing the kind of retirement lifestyle many aspire to.

“However, what these figures will look like post pandemic is yet to be seen and as we now as we enter a cost-of-living crisis people may understandably prioritise money in their pocket today over ploughing money into their pension.”

Elsewhere, the stats showed that gross pension tax relief in 2019-20 is projected to reach £41.3bn, up from £38.2bn in the previous period.

In relation to pension withdrawals – the only area where HMRC disclosed figures for 2020-21 - £9.6bn was withdrawn in the period, a decrease of 2 per cent when compared with the previous year.