Pension contributions exceeding AA fall by nearly £100m; LTA charges increase

The total value of pension contributions that were reported by savers as exceeding the annual allowance (AA) fell from £912m in 2017/18 to £817m in 2018/19, HMRC has revealed.

A total of 34,220 taxpayers reported contributions exceeding their AA in 2018/19, up from 29,910 the previous year.

The average amount the AA was exceeded was therefore £23,874, meaning that the average charge per member, with a typical tax rate of 40 per cent, was £9,549.

Despite the fall in contributions exceeding the AA, the total value of AA charges reported by schemes in 2018/19 was £209m, a 71 per cent year-on-year increase.

A total of 13,660 AA charges were reported by schemes.

“These eye-watering figures explain why senior clinicians in the NHS have chosen to stop work or retire due to the huge tax bills they are facing each year for breaching the AA,” commented Quilter pensions expert, Ian Browne.

“However, this problem is not just restricted to the medical world with judges, the armed forces and other public sector workers are facing enormous tax charges simply for saving for their retirement.

“This data adds to the argument that we need to take a very careful look at the current pension tax system for the public sector and see whether it is still fit for purpose.”

HMRC’s figures also revealed that the total value of Lifetime Allowance (LTA) charges increased by 6 per cent in 2018/19, from £269m to £283m, the largest amount since the LTA was introduced in 2006.

There were 7,130 LTA charges reported by schemes in 2018/19, up slightly from the 7,030 a year earlier.

HMRC found that 1,400 savers paid a 55 per cent LTA charge and 5,730 paid a 25 per cent LTA charge, meaning that total revenue to HMRC was £283m, a year-on-year increase of 5 per cent.

The LTA was frozen at £1,073,100 until April 2026 at the 2021 Budget.

LCP partner, Karen Goldschmidt, called for a simplification of pension tax relief limits: “The Annual and Lifetime limits were originally designed to catch only those with the largest amounts of pension saving in a given year or with the largest pension wealth over a lifetime. 

“But the Treasury has increasingly seen pension tax relief limits as a ‘go-to’ source of additional revenue, especially compared with raising headline tax rates. The current system reflects a stream of salami slicing and knock-on ‘tweaks’. 

“We now have a system subject to constant change and uncertainty, with considerable complexity and with no obvious and coherent rationale. It is time for a fundamental rethink of tax relief limits to come up with a system which is simpler, less distorting and which will stand the test of time.”

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