Pensions allowance and HMRC

Lubbock Fine, 10 October 2019

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Recent data from HMRC shows that during the 2017/18 tax year, more than 37,000 people were hit with a tax charge for over-contributing into their pension. This doubles the previous year’s figure and brings in revenue of a staggering £173m to HMRC, 66% higher than the year before.

Reports in the national news recently indicate that doctors are taking early retirement and/or not working overtime in a bid to avoid the annual allowance tax charge. However, it’s important to realise that this isn’t a tax charge only affecting doctors.  It can affect anyone paying into pensions. 

What is the Pension annual allowance?

The annual allowance is the limit you (and others on your behalf, such as your employer) are able to contribute in total into your pension plans every tax year without you suffering a tax charge. The standard allowance is currently set at £40,000, with a carry-forward provision allowing use of any unused pension allowance from the last three tax years (subject to eligibility conditions).

To make this allowance even more confusing, in 2016 the government introduced the tapered annual allowance. This further restricts the amount high earners can pay into their pensions tax efficiently. People with gross ‘adjusted income’ (which includes employer pension funding) of over £150,000 will have their pension allowance reduced by £1 for every £2 over £150,000. The minimum allowance is £10,000. This means if your adjusted income is £180,000 gross, your annual allowance is £25,000 (a reduction of £15,000). Anyone whose income excluding their own pension contributions (and not including employer funding) doesn’t exceed £110,000 isn’t subject to the taper even if their adjusted income is over £150,000. The rules are complicated.  If you need advice on your own, individual circumstances, please feel free to contact us.

Another complexity is the Money Purchase Annual Allowance (MPAA) which is now down to £4,000. This applies in certain circumstances where money purchase pension benefits have been ’flexibly’ accessed. The MPAA applies to money purchase pension funding only and can’t be increased using carry forward. MPAA won’t apply to everyone.  If you’re unsure of whether your circumstances mean that you qualify, do please contact us.

What happens if you contribute more than your annual allowance?

If you (and others on your behalf) contribute more in total into your pensions than your annual allowance, a tax charge will trigger. To work out the tax charge, the excess contributions are added on top of your income for the tax year (to give a tax rate between 20% and 45% depending on your income). Where the excess contributions relate to your own contributions, the tax charge effectively claws back the tax relief on the excess contributions but even if the excess relates to employer contributions you will still be liable for the tax charge on them. In some circumstances the tax charge can be paid by the pension scheme out of your pension benefits but it isn’t always possible. You may find yourself having to pay the charge personally.

Tom Selby, a senior analyst at investment platform, AJ Bell, says: “The staggering impact of the Treasury’s pension tax grab has been laid bare by today’s figures. Twice as many people were clobbered with an annual allowance charge in 2017/18 compared with the previous tax year, with hundreds of millions snatched from the grasp of hard-working savers.’’

Whilst on the surface this might seem like a tax on the rich, it affects the amount of savings people are putting towards their retirement, which could prove a bigger problem for the government in future. There have been calls in the media for the annual allowance to be scrapped to remove the complexity surrounding pension legislation but so far, the government doesn’t seem to be listening.

Andrew Tricker, director at Lubbock Fine Wealth Management commented: “Pension simplification was introduced in 2006 and it gets ever more complicated! It’s a major concern that the best NHS people may quit because of tax charges relating to their pension funding, despite the recently announced consultation aimed at easing the problem.”

How can we help?

We understand the complexities surrounding pensions and are able to advise on what is most suitable for you. Please contact Andrew Tricker, LFWM director on 0207 490 7766 or email