Thousands of higher earners have been caught out by a clampdown on pensions tax relief, which delivered an estimated £250m to the Treasury.
New figures from HMRC, the UK tax authority, showed the value of tax paid on breaches of the lifetime allowance, — the amount that can be saved in a pension and benefit from tax relief — rose to £102m in 2016-17 from £66m the year before. The lifetime allowance was cut from £1.25m to £1m in 2015-16.
Meanwhile the total value of contributions breaching the £40,000 tax free annual allowance — the amount that can be invested in a pension each year and benefit from tax relief, soared to £517m in 2016-17, up from £143m the year before.
The number of individuals who fell foul of the annual allowance limits more than doubled to 18,930 in 2016-17 from 7,150 the year before.
HMRC did not report how much tax it collected from these payments. Hargreaves Lansdown, the investment managers, estimated it would have been about £150m, with the majority of it coming from a new taper to the allowance for people with total income of more than £150,000 a year.
‘The rules that restrict contributions are fiendishly complex, but seem to have met their target of clawing back some valuable revenue for the Treasury,” said Nathan Long, senior analyst at Hargreaves Lansdown.
“Few people will shed a tear for higher earners, but these rules heap complexity into the pension system that ends up impacting everyone.”
The taper is a reduction to the £40,000 annual allowance, based on an individual’s total income for the tax year. One pound of the allowance is withdrawn for every £2 of income above £150,000, until the allowance reaches £10,000.
The annual allowance tax charge is levied at the individual’s marginal rate, meaning top earners would have paid 45 per cent tax on pension savings in excess of their individual thresholds.
Patrick Connolly, chartered financial planner with Chase de Vere, the independent financial advisers, said: “The introduction of the tapered annual allowance and the money purchase annual allowance have caused confusion especially when people are also benefiting from employer pension contributions.
“We have seen this first-hand, as we advise many high earning doctors who are struggling to understand how their NHS pension scheme contributions affect the level of tax efficient payments they can make into personal pensions, especially if they may also be subject to the tapered annual allowance.”
Steve Webb, director of policy with Royal London, a pension provider said that although “relatively small numbers of people are affected” by the multiple cuts to pension tax relief “the tax bills are huge”.
Separately HMRC said the Treasury received a record £13.5bn in tax from over-55s, up from £13.4bn the previous year, who took advantage of freedoms to spend their retirement savings as they wished.
Retirees pay tax on money they take from their pension pots at their marginal rate, after the first 25 per cent which is typically tax free.
“The pension freedoms have provided a huge tax windfall to the Treasury as hundreds of thousands of savers have accessed their retirement funds flexibly,” said Tom Selby, senior analyst at AJ Bell, an investment platform provider.
“While the flexibility created by the freedoms has been popular among savers, it’s pretty clear raising cash was at least part of the reason the government introduced the changes.”