The number of people paying charges for going over the pension allowance has rocketed by 11,000% in the last 10 years
The number of savers hit by pension allowance charges has rocketed in the past year, new figures show.
More than 37,000 people were hit with annual allowance charges in 2017/18, double the number recorded in the previous year, according HM Revenue and Customs (HMRC).
The data shows that 26,550 people have reported contributions worth £812 million over the annual allowance.
This means that on average, those above the allowance face paying tax on an excess contribution of around £30,600.
The number of people reporting a breach has gone up by more than 11,000% in the past decade from 230.
Some £173 million has already been paid by over 10,000 savers in annual allowance charges in 2017/18.
Pension experts have blamed the rise in breaches on the taper introduced in 2016. This meant that anyone earning over £150,000 had the amount they can save into a pension each year reduced.
Tom Selby, senior analyst at AJ Bell, says: “The staggering impact of the Treasury’s pension tax grab have been laid bare by today’s figures.
“Twice as many people were clobbered with an annual allowance charge in 2017/18 compared with the previous tax year, with hundreds of millions snatched from the grasp of hard-working savers.
“The culprits behind this spike in pension tax are almost certainly the taper, which lowers the annual allowance for high earners, and the money purchase annual allowance (MPAA), which penalises those who take taxable income from their retirement pot.”
Annual limit on pension contributions
The annual allowance is based on your earnings for the year and is capped at £40,000.
It is a limit to the total amount of contributions that can be paid to defined contribution pension schemes.
The lifetime allowance is a limit on the amount of pension benefit that can be drawn from pension schemes whether as a lump sum or retirement income and caps total benefits at £1,030,000 (in the 2018/19 tax year).
The total tax taken from the lifetime allowance tax charge has increased from £13 million in 2006/07 to £185 million in 2017/18.
Most of the increase has taken place since 2012 when the government started cutting the lifetime allowance.
In total, 4,550 pension savers were taxed for breaching the lifetime allowance – up from 36% the previous year.
Andrew Tully, technical director at Canada Life, says: “The lifetime allowance is an arbitrary tax which penalises individuals who have enjoyed good returns on their investments.
"There is also a significant disparity in the way benefits are measured against the lifetime allowance depending on whether the individual is a member of a defined benefit or defined contribution scheme.
“With a relatively low cap on contributions to pensions of £40,000 a year, and less for higher earners, the government should consider scrapping the lifetime allowance.
"This would massively simplify pensions for schemes, providers and, most importantly, customers, by removing a huge amount of complexity around areas such as benefit crystallisation events.”