Research by Royal London shows that more people than ever are breaking pension rules, and they run a risk of HMRC claiming back any tax perks acquired through the annual pension allowance.
Between the tax years 2012-13 and 2014-15, extracted by a request through the Freedom of Information Act, data shows there was a 79% increase in the amount of people who saved beyond the allowance allowed during that time of £50,000.
However, true figures are likely to be much higher, as the statistics submitted to HMRC only represent people reporting their pension contributions.
Many others, predominantly those in “defined benefit” pension schemes, will be unaware because of employers’ contributions and the complex methods used to calculate the total.
The annual allowance has been dramatically cut from a high of £255,000 from as recently as 2010-11, and now sits at £40,000 for 2016-17. These changes came about in an attempt to save billions in pension tax incentives.
For taxpayers earning under £32,000 p.a. your contribution toward your pension is topped up by the Government by 20%. This means that for every £80 you save for your pension, it is topped up to £100. A higher-rate taxpayer has to pay in only £60 to make a £100 pension contribution.
However, if HMRC finds that you have been saving beyond these levels, it will reclaim any tax relief that it has paid out.
How much can I put into my pension each year?
• You can contribute as much as you earn in a year, up to £40,000 annually
• You can also use the past three year’s pension contribution limits if you were a member of a registered pension scheme during that period, and haven’t already – HMRC’s “carry forward rules”
• Your pension limit will be affected if you draw any income from it (not including tax free cash), falling to £4,000. Prior to the Autumn Statement this was £10,000.
Are you a high earner?
• Workers earning over £150,000 will have their annual pension allowance gradually reduced to £10,000 once they earn £210,000 or more.
• To work out whether you will be affected you need to calculate a “threshold” and “adjusted” income.
• If your threshold income is more than £110,000 and adjusted income is more than £150,000 a year you will be caught and start to see your annual allowance drop.
• Threshold income includes income from all sources, not just your salary. From this deduct pension contributions. If the figure produced is less than £110,000 then your annual allowance will be £40,000. If it is above this limit however, you need to calculate adjusted income.
• Adjusted income is calculated in a similar way to threshold income but includes the pension contributions that you and your employer make both from gross pay and via salary sacrifice.
• If adjusted income totals more than £150,000 the taper applies and your annual allowance will fall by £1 for every £2 of adjusted income between £150,000 and £210,000
If you’re concerned about your pension planning or how the information above affects you, please call us on 01691 670524 and speak to an Independent Financial Adviser.