Pension savers hit by sharp tax rise
More than 30,000 people faced unexpected tax charges last year after exceeding their pension contribution limits. In 2024/25, 30,440 individuals reported pension contributions exceeding their personalised annual allowance through self-assessment, up from 24,950 in 2023/24. The total value of excess contributions rose to £672 million from £505 million.
Allowance increases failed to curb breaches
The standard annual allowance has been £60,000 since April 2023, a 50% increase from the previous £40,000 limit. The change aimed to give savers more flexibility, but the latest data shows it did not reduce over-contributions.
David Little, Partner in Financial Planning at wealth management firm Evelyn Partners, commented: “These are quite striking increases of 22 per cent in the number of individuals reporting annual allowance breaches and 33 per cent 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 by then Chancellor Jeremy Hunt in April 2023 following his Spring Budget. That, you might have expected, would lead to a fall in breaches in the subsequent years as people had more leeway to make large annual pension contributions than they had enjoyed for nearly 10 years.”
Little identified the tapered annual allowance as a key factor. For high earners, the £60,000 allowance decreases once threshold income exceeds £200,000 and adjusted income tops £260,000. The taper reduces the allowance by £1 for every £2 of additional income, potentially lowering it to £10,000.
Related: Mysterious Villa Has Dark History Revealed
“The headline £60,000 allowance can give higher earners a false sense of security,” Little said. “Bonuses paid at the end of the tax year, variable earnings and contributions across several schemes make the final position difficult to predict until late in the tax year, by which time it’s very difficult to unwind pension contributions made during the tax year.”
Adjusted income includes employer pension contributions, so somebody may be caught even where their personal contributions appear relatively modest. HMRC’s reliance on self-reporting worsens the issue, as breaches may go unnoticed for two or three years. By then, savers face a tax charge that earlier planning could have prevented.
Defined-benefit schemes add complexity
Public sector workers and others in defined-benefit schemes face higher risks. These schemes assess the increase in the value of the promised pension, not just the money paid in. Recent pay deals may have pushed more savers over the limit without their awareness.
Inflation and rising salaries likely contributed to the problem. “A very plausible cause is that more high earners were being surprised by the tapered annual allowance,” Little explained. “Plausible because this was a period of raised inflation when high earners could easily have lost track of the impact on pension contributions of increasing salaries and bonuses. Also many annual allowance breaches occur within defined benefit schemes where it is harder for employees to keep track of how their pension is tested against the allowance, and generous public sector pay deals during this period could have contributed.”
The data reveals the difficulties of planning around pension limits. Savers can carry forward unused allowance from the previous three tax years, but accurate calculations require up-to-date figures from every scheme. For defined-benefit members, this means tracking the increase in the value of their promised pension, not simply what they have personally paid in.
Related: Amazon teams up with rare disease researchers
When a charge on an annual allowance breach is unavoidable, savers should establish whether Scheme Pays is available to allow the charge to be paid from their pension scheme. Little advised against stopping contributions entirely to avoid the charge. “Giving up valuable employer contributions, tax free growth inside the pension fund or defined-benefit accrual could leave them materially worse off in the long run,” he said.
The system remains complex, with multiple factors contributing to breaches. Increased employer contributions and unexpectedly high pension growth within defined-benefit schemes can also drive annual allowance breaches. HMRC doesn’t monitor these breaches in real time, relying on self-reporting, which means some savers don’t realise for years that they’ve been over-contributing.
HMRC’s figures come from self-assessment filings, so some breaches may have occurred earlier but only now been reported. The lag shows why savers need to monitor contributions more closely, particularly as earnings and pension values change.
Experts recommend reviewing pension statements annually and consulting financial advisers to avoid surprises.
