79% rise in numbers breaching pension allowance
A Freedom of Information request made by insurer Royal London showed that 7,000 people saved more than they were allowed into pensions in 2014/15, a 79% rise on the 3,900 people who reported on their tax return in 2012/13 that they had saved more than the limit.
The annual allowance – the amount you can save into a pension each year and still qualify for tax relief – was £50,000 in 2012/13 but dropped to £40,000 in 2014/15.
Royal London thinks the number of people breaching the allowance will have ‘risen substantially’ in 2016/17 because of new tapered rules for higher earners that came in last April.
Under the new rules, the annual allowance will be cut by £1 for every £2 of earning for people with an income of £150,000 or more. Once adjusted income exceeds £210,000 the annual allowance bottoms out at £10,000.
Those who breach the limit will face a tax charge to claw back any tax relief they have received on contributions above the allowance.
People can save above the annual allowance by carrying forward unused allowances from up to three earlier tax years.
This means that 2016/17 is the last year for which unused allowances from 2013/14 can be carried forward.
As 2013/14 was the last time the limit was £50,000 (before being cut to £40,000 from 2014/15) high earners have little more than a month to use up spare allowances from that year by making pension contributions, Royal London said.
After 6 April 2017 any unused allowance from 2013/14 will be lost.
Steve Webb, Royal London policy director, said: “Pension tax relief has been squeezed year after year, and these new figures reveal a big growth in the numbers paying a tax penalty for being over the annual allowance limit.
With a big cut in annual allowances for high earners in 2016/17, many more people risk breaching the limit unless they cut back on their contributions or use up unused allowances from earlier years. Savers have just a few weeks to use up spare allowances from 2013/14. It is worth anyone in this position finding out urgently how much they have spare from earlier years and to take impartial advice to help them plan the right level of pension contributions before the end of this tax year”.