Annual pension allowance: how to avoid getting caught this year

There has been a startling rise in the number of people who breach the annual pension allowance and who now risk HMRC clawing back tax perks, new figures show.

Telegraph.co.uk

Between the tax years 2012‑13 and 2014‑15, the most recent for which data is available, there was a 79pc increase in the number of people who saved more in a pension in a single year than the pension allowance rules allow.

This is more evidence that the pension system has become so complicated that the rules are having the perverse effect of discouraging prudent saving for later life.

Pension company Royal London extracted the data on the “annual allowance” from the taxman using a Freedom of Information request.

It found that in 2012‑13, when the annual pension allowance was £50,000, 3,900 people reported that they had saved more than the limit. This rose to 5,800 in 2013‑14 and 7,000 in 2014‑15 – an increase of 79pc.

The true figure for breaches is likely to be far higher as HMRC’s statistics only show people who reported how much they had contributed to a pension.

Many others, particularly those in “defined benefit” pension schemes, will be unaware, because of employers’ contributions and the complicated methods used to calculate the total.

Since 2014‑15 the annual pension allowance has been £40,000 for most people, down from a high of £255,000 as recently as 2010‑11. Ministers have steadily cut the allowance in a bid to save billions of pounds on pension tax incentives.

When you save into a pension, your contribution is topped up by the Government in line with your rate of income tax. So a higher-rate (40pc) taxpayer has to pay in only £60 to make a £100 pension contribution.

But this tax perk is subject to the £40,000 annual contributions allowance and the £1m lifetime limit on pension fund value. If HMRC discovers savings beyond these levels it will reclaim the tax relief it paid out.

Steve Webb, a director at Royal London and former pensions minister, warned that more people would break the limits next year.

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This entry was posted by John on Tuesday, March 21st, 2017 at 6:41 pm and is filed under Pension news.