The amount savers have contributed above the annual allowance on pensions has more than tripled in the last year.
Figures released this morning by HM Revenue and Customs show that for the 2015/16 tax year, total annual allowance breaches came in at £179m. This has now jumped to £561m in 2016/17, the year the tapered annual allowance for high earners came into effect.
While the government does not separate how much of the tax revenue came from high earners on a tapered threshold compared to the standard annual allowance, it suggests the taper rules brought in from April 2016 may have had a significant impact.
Canada Life pensiosn technical director Andrew Tully notes that the statistics will not have taken the reduction in the money purchase annual allowance to £4,000 in April 2017 into account yet, so annual allowance tax takes will likely be even high next year.
Tully says: “Even something which sounds as simple as an annual allowance is complicated by the fact we have three different limits – a standard allowance, a very low allowance for those who have flexibly accessed their benefits, and a fiendishly complicated position which reduces the limit for higher earners. This complexity means many individuals may be unintentionally caught by the annual allowance.
“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.”
Contributions above the lifetime allowance have also jumped from £66m to £102m in 2016/17 as the limit decreased from £1.25m to £1m.
Nucleus product technical manager Rachel Vahey says the rise “demonstrates in vivid terms how many more people are ‘hitting’ the lifetime allowance as it moves from being a ‘fat cat’ tax to one that affects thousands of ordinary pension savers.”