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Tax man takes £53m from pension allowance breaches

High earners are being stung with hefty tax charges following the introduction of a complicated taper determining how much can go into a pension each year.

Tax man takes £53m from pension allowance breaches

Savers paid £53 million in tax charges for breaching the annual allowance for pension contributions in 2016/17, the year complicated new taper rules were introduced.

Following changes brought in from April 2016 the annual allowance has been tapered down from £40,000 to £10,000 for high earners.

Citywire’s New Model Adviser® asked HM Revenue & Customs (HMRC) for the total amount paid in relation to breaches of the annual allowance for the tax year 2016-17.

Tax charges for exceeding the annual allowance are collected in two ways: either direct through ‘scheme pays’, or through self-assessment tax returns.

So far only data from scheme pays payments is available for the latest tax year, because self-assessment returns for the 2016-17 tax year will not be received by HMRC until January 2018.

That means the total taken in tax charges for breaching the annual allowance is likely to be even higher.

According to HMRC: ‘2,400 individuals paid through scheme pays, rounded to the nearest 100. These individuals paid a total of £53 million to the nearest £1 million.’

Steve Webb, director of policy at pension provider Royal London, said HMRC's response showed that changes to the annual allowance were having a much bigger impact than might be apparent from the headline figures.  

As well as the extra tax that people are paying through the self-assessment process, and as well as the behavioural changes whereby people are limiting their pension saving to avoid breaching the cap, the annual allowance is also generating huge tax bills for a relatively small number of people which are being paid by their pension scheme.

Average tax bills of over £22,000 per person through the ‘scheme pays’ process will be having a material impact on the ability of higher earners to build up significant pensions.   

‘The fact that the scheme pays the bill in the short-term must not hide the fact that these individuals will fact a significantly reduced pension as a result and they should be taking financial advice to ensure that this is the right strategy for them in the long-term,’ Webb said. 

Compare this to the amounts taken last year.

Tax taken for breaches via scheme pays for the previous tax year 2015-16 was £12.5 million. However, these figures have fluctuated over the years

In 2011-12 the amount taken for breaches via scheme pays was £45.3 million; in 2012-13 £30.9 million was collected; £55.1 million for 2013-14; £36.3 million for 2014-15 and £12.5 million for 2015-16.

As for self-assessment, the number of people reporting breaches in the annual allowance has been steadily rising.

As revealed by a separate information request by Royal London, in 2012/13, when the annual allowance was £50,000, 3,900 people reported on their tax return that they had saved more than the limit, rising to 7,000 people in 2014/15 when the limit had been cut to £40,000.   

The taper reduces the annual allowance by £1 for every £2 earned by people with income of over £150,000, with a maximum reduction of £30,000. This means for those people with incomes of over £210,000 their annual allowance will be £10,000. And for those who go over their tapered annual allowance, they will end up with a 45% tax charge from HM Revenue & Customs on anything they go over it by.

April 2017 is the first time the new tax rules will come into force, applying to the 2016/17 tax year.

Last year providers and financial advisers called for the taper to be scrapped, branding it ‘almost impossible to operate’. In addition to being tricky to explain, the taper complicates the administration of defined benefit, or final salary, pension schemes.

Tom McPhail, head of policy at investment broker Hargreaves Lansdown, said: ‘This reinforces the need for the pensions industry and the Treasury to finally find a way through the complexity of the pension tax system, that rewards people for saving for retirement, rather than all these checks and balances.’

2 comments so far. Why not have your say?


Aug 03, 2017 at 12:46

The author & Mr Webb overlook the fact that the CPI for revaluing pension input amounts in 2016-2017 was 0%, & the publication of that rate in September 2015 was an early warning of the issue. A higher CPI rate would have reduced the tax liabilities, as it had done in previous tax years e.g. CPI of 5.2% for 2012-2013

Plus, the tax charge would only arise if the individual had used all allowances from previous years, when there will have been a prior build-up in pension.

Paying income tax on earnings over £150,000 p.a. is a "problem" that a lot of people on much lower earnings would love to have

report this


Aug 03, 2017 at 15:39

It would be much simpler if tax relief was just set at 20% of anything a person put into their pension plan.

It's coming in for the tax relief on buy-To-let mortgage interest and could be extended to pensions.

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