Thousands more pension savers have been hit with unexpected tax charges after falling foul of complex pension rules – despite the Government increasing the amount people can save tax-free.
New HMRC figures reveal the number of people forced to report breaching their annual pension allowance jumped by 22% in a year, while the amount of excess pension savings declared rocketed by a third. The latest official statistics show 30,440 people reported pension contributions above their personalised annual allowance in the 2024/25 tax year, up from 24,950 the previous year.
At the same time, the total value of pension contributions exceeding the limit climbed from £505million to £672million – a rise of 33%.
The figures are particularly surprising because the standard annual allowance had already been increased from £40,000 to £60,000 in April 2023 by then Chancellor Jeremy Hunt, a move designed to encourage pension saving and reduce tax penalties.
Instead, experts say thousands of higher earners are being caught by one of the tax system’s most complicated rules – the tapered annual allowance.
David Little, partner in financial planning at wealth manager Evelyn Partners, said the increase suggested many savers were being caught out as rising pay and bonuses pushed them into the little-understood tax trap.
He said: “These are quite striking increases of 22% in the number of people reporting annual allowance breaches and 33% in the total value of contributions above the allowance.
“What is slightly surprising about the figures is that the annual allowance was raised from £40,000 to £60,000 in April 2023. You might have expected that to lead to a fall in breaches as people had more leeway to make large pension contributions.”
Mr Little said a likely explanation was that more higher earners were unknowingly being caught by the tapered annual allowance during a period of strong wage growth and inflation. Under the rules, although the headline annual allowance is £60,000, it can be slashed dramatically for those with higher incomes.
People with threshold income above £200,000 and adjusted income exceeding £260,000 see their allowance reduced by £1 for every £2 of additional adjusted income, potentially leaving them with an annual allowance of just £10,000.
Crucially, adjusted income includes employer pension contributions, meaning workers can breach the limit even when they have made relatively modest personal payments into their pension.
Mr Little warned that bonuses, salary increases and membership of more than one pension scheme can all make it difficult to calculate whether someone is approaching the limit. He also pointed to defined benefit pension schemes, particularly in the public sector, where pension growth rather than contributions is measured against the allowance.
Generous public sector pay awards during the period may also have contributed to more people exceeding their allowance, he suggested. Another problem is that HMRC does not warn savers as the breach happens.
Instead, people normally discover the problem only when completing a self-assessment tax return, sometimes years after the contributions were made, potentially leaving them facing a substantial backdated tax bill.
Mr Little urged savers, particularly higher earners, to monitor pension contributions throughout the tax year rather than waiting until it is over.
He also advised checking whether unused annual allowance from the previous three tax years can be carried forward to reduce or eliminate a tax charge.
Where a charge cannot be avoided, some pension schemes allow the tax bill to be settled directly from the pension through the “Scheme Pays” facility.
He added: “What we are seeing here is evidence that pension taxation remains too complex for most people and even financially savvy earners can get caught out. It’s striking how many high earners are completely unaware that their pension allowances are tapered until it’s too late.”
The figures come from HM Revenue & Customs’ latest private pension statistics, published last week, covering the 2024/25 tax year.