The latest figures from HMRC's Personal Pension National Statistics show that 26,550 people breached their annual allowance in 2017/18, paying in a total of £812 million above their allowances. This is a big increase on the 18,500 people who paid in an extra £578 million in the previous tax year.
Most people can pay as much as they earn into their pension each year, up to a maximum of £40,000. However, the rules are more complex for higher earners – we look at these in more detail in the next section.
If you breach the annual allowance you must pay a tax charge on the excess contributions. The rate of tax depends on how much Income Tax you usually pay.
In April 2016 the Government introduced the tapered annual allowance. This reduces the annual allowance for people with more than £150,000 of annual income. The allowance reduces by £1 for every £2 of income above this amount, down to a minimum of £10,000.
However, the calculations over what constitutes income are notoriously complex. This has meant many people breaching their allowance without realising, and facing surprise tax bills.
This has especially been an issue for higher-earning NHS professionals, who must pay a percentage of their earnings into their final salary pensions each year. As you may have seen in the news this year, many NHS staff have reduced their working hours or retired early because their pensions have breached the annual allowance and created extra tax bills.
HMRC statistics have also shown growing numbers of people breaching the lifetime allowance. While the annual allowance limits the amount that you can pay into a pension each year, the lifetime allowance is the maximum amount you can hold in your pension. It is currently £1.055 million – and any pension savings above this will be subject to tax charges of up to 55% when they are withdrawn.
The latest figures show that 4,550 people were hit with this tax charge in 2017/18, a 36% increase on the 3,350 people in the previous tax year. The total value of the tax charges was £185 million, up from £144 million the year before.
At Tilney we have financial planners who specialise in helping people save for retirement and make the most of these two allowances. They can help you with:
For more information about what a financial planner could do for you, please book a no-obligation initial consultation. It’s the perfect opportunity to ask any questions about your pension and find out if they could help you.
You can also book a consultation or find out more about the allowances by calling us on 020 7189 2400.
Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change.