Published On: Thu, Sep 26th, 2019

Tax on pension contributions: HMRC reveal thousands breached annual allowance | Personal Finance | Finance

Data published today by HM Revenue and Customs (HMRC) shows that more than 10,000 savers paid annual allowance charges in 2017 to 2018 by Accounting for Tax return. This total came to £173 million. A further 26,550 people reported contributions exceeding their £40,000 annual allowance through a Self Assessment Return. The total value of these pension contributions exceeding the annual allowance reached £812 million.

In the previous year, 18,500 individuals reported pension contributions exceeding their annual allowance through Self Assessment to be £578 million.

The number of annual allowance charges paid by the scheme through the Accounting for Tax return was 5,300 in 2016 to 2017, with the total value reaching £104 million.

The standard annual allowance is a limit to the total amount of contributions that can be saved in pension pots in a tax year.

This is £40,000, and tax is only paid if a person goes above the annual allowance.

There is also a lifetime allowance, which is currently £1,055,000.

Mark Futcher, Partner and Head of DC and Workplace Wealth at Barnett Waddingham, said: “The recent raft of pension changes represents two steps forward and one step back for the UK’s legion of pension savers.

“Auto-enrolment is working; more people are saving towards retirement and ultimately benefitting from employer contributions and tax relief.

“But, there are still significant problems to tackle. Annual average contributions to personal pensions have decreased. Meanwhile, the annual and lifetime allowance is proving to be a tax minefield.

“The Treasury’s pension tax grab has affected almost 40,000 savers who breached the complex annual allowance. Ultimately, we are still in the midst of a pension crisis; retirements are chronically underfunded.

“Employers are perfectly placed to play a central role in improving retirees’ financial prospects. For employees, financial education programmes will help them boost saving confidence and develop long-term saving habits.

“If the firms themselves want to attract and retain talent, they simply have to be offering comprehensive pension planning, remuneration and wider benefits.”

Helen Morrissey, pension specialist at Royal London, said: “Today’s figures show the total value of contributions reported as exceeding the annual allowance has surged from £578m in 2016/17 to £812m in 2017/18.

“This is just the beginning and we will see more and more people being caught out by this overly complex regime as time goes on.”

Quilter head of retirement policy, Jon Greer, said: “Breaching the annual allowance used to be something that only the very highest earners had to worry about.

“When company executives on significant salaries face checks and balances on the amount they can save with tax relief that is one thing, and those people will already be in a position where their own accountants and advisers to help navigate the complexity.

“But just ten years after a meagre 230 people faced an annual allowance tax charge in 2007/2008, it is now common place for ordinary workers to be confronted with the complexity of the pension annual allowance and the associated savings dilemma.

“In the 2017/2018 tax year more than twenty six and a half thousand people reported breaching the annual allowance tax charge, a staggering 11,443 per cent increase on the same figure ten years ago.

“The figures also show 10,750 people opted for a ‘scheme pays’ option to deal with the tax charge. In total close to £1 billion was paid in annual allowance charges, most of which was paid up front by the individuals affected, with £173 million paid under the scheme pays option.

“This dramatic shift means that it is now relatively normal for people to face limits on the amount they can save with tax relief and penalties for exceeding that.

“It places real pressure on people trying to plan their finances and discourages individuals from setting money aside for the future.

“It is especially problematic for those with variable earnings or bonuses, who may save at a rate through the year which they expect to be under the annual allowance, but then find their plans are thrown off course as their earnings change.

“And of course we know that in the public sector in particular, the introduction of the ill-conceived annual allowance taper has had a disastrous impact.

“Thousands of doctors, civil servants, judges, armed forces personnel and other public sector workers have faced tax penalties for breaching the annual allowance because of the way their schemes and contributions rates are structured.

“The result is that employers are having to implement complex workaround, and government departments from the NHS to the MoD are having to devise workaround to alleviate staffing pressures as senior employees consider reducing hours or retiring to avoid the punitive tax charge.

“If you are in a position where this might affect you it is essential to take advice to ensure you use your tax allowances effectively. The system becomes extremely complex at this point and almost impossible to navigate without expert help.”

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