Pensions tax traps catch out thousands more savers
The number of savers who breached the annual allowance and the lifetime allowance increased in 2018/19, according to government statistics.
Figures from HMRC show 34,220 people reported saving more in their pension pots than the £40,000 annual allowance in 2018/19, triggering total tax charges worth £817 million.
The amount of people who exceeded their annual pension allowance in 2018/19 was 14% higher than the previous tax year, when 29,910 savers were caught.
Savers who breach this allowance can either pay the tax charge via an accounting-for-tax (AFT) return, or via self-assessment tax returns on or before 31 January.
According to the data, the value of annual allowance charges reported by schemes via AFT returns in 2018/19 was £209m – up 71% 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.
“This complexity means many individuals may be unintentionally caught by the annual allowance, although this should ease in more recent tax years due to the rise in the tapered annual allowance threshold.”
Meanwhile, the number of tax charges for individuals who breached the lifetime allowance over the same period grew by 6% – from £269m to £283m.
A 55% charge applies on excess funds that are taken as a lump sum, while a 25% charge awaits if excess funds are taken as retirement income, which is taxable at the marginal income tax rate.
“Interestingly, most savers chose to pay the tax charge of 25% and retain the money in the pension, rather than opt for the rather more salty lump sum charge of 55%,” added Tully.
“Freezing the lifetime allowance [at £1,073,100] for the next five years will mean more and more people will get caught by this relatively arbitrary figure.”
For further information on tax-efficient advice, please contact Helen Spalding on 023 8046 1234.