Andrew Tully, Technical Director at Canada Life comments on the data: “Today’s figures from HMRC reveal that the impact of the money purchase annual allowance and tapered annual allowance hit savers hard in the 2019/20 tax year. While the value of contributions exceeding the limit has actually dropped slightly, the cost of charges has increased by 71%. Jumping to £209 million in 2018/19 from £122 million the previous year. 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 AA, although this should ease in more recent tax years due to the rise in the tapered annual allowance threshold.
“We have also seen a 6% increase in savers being caught out by the Lifetime Allowance, with the tax now bringing in £283 million compared to £269 million the previous tax year. Interestingly most savers choose to pay the tax charge of 25% and retain the money in the pension, rather than opt for the rather more salty lump sum charge of 55%.
“The Lifetime Allowance has since been frozen for the next five years, meaning more and more people will get caught by this relatively arbitrary figure, with the Treasury expecting to raise an additional £1bn in tax. This measure simply sends the wrong signal to savers trying to do the right thing. It also penalises good investment performance. Instead of constant tweaks we need stability to give people confidence to save for the long-term.
“This is a complicated area of pension planning and it is all too easy to get caught out, so anyone concerned about breaching either of these limits should consult a professional financial adviser.”
• In 2018 to 2019, 34,220 tax payers reported pension contributions exceeding their AA through Self Assessment, paying an average charge of £23,874
• The total value of contributions reported as exceeding the AA was £817 million in 2018 to 2019, decreasing from £912 million in 2017 to 2018 and £584 million in 2016 to 2017
• The total value of AA charges reported by schemes in 2018 to 2019 was £209 million, a 71% increase from £122 million in 2017 to 2018.
• In 2018 to 2019, 7,130 LTA charges were reported by schemes through AFT returns. The total value of LTA charges reported by schemes in 2018 to 2019 was £283 million, a 6% increase from £269 million in 2017 to 2018.
• 80% of savers choose to pay a 25% LTA charge, preferring to leave the money in the pension scheme, rather than withdraw as a lump sum (a 55% charge)
• Tapered annual allowance (introduced in 2016) will continue to hit high earners in tax year 2019/20 as the adjusted income threshold remained at £150,000 in that year. As the taper threshold was increased significantly from April 2020 it should reduce the impact of the AA for some individuals in more recent tax years but we will need to await future statistics to show by how much
• The impact of the Annual Allowance (AA) tax charge has increased massively. There are two ways of paying the tax charge. One is the scheme pays through their Accounting for Tax return, the other is through an individual’s self-assessment tax return
o Self-assessment return: The amount of contributions which exceed the AA have grown from £148m in 2011/12 to £817m in 2018/19
o The number of individuals reporting these excess contributions through their tax return was 34,220. That means the average excess contribution was £23,874.
o Accounting for Tax Return: The total value of AA tax charges paid by schemes has increased from £40m in 2011/12 to £209m in 2018/19
• The AA tax take isn’t broken down to show how much is raised as a result of breaching the standard annual allowance, how much is down to the tapered annual allowance (for high earners) or money purchase annual allowance (MPAA), which affects those who have flexibly accessed their pension benefits.
• The MPAA was introduced in April 2015 but the limit reduced significantly to £4,000 from April 2017. This reduction will be a contributory factor in the level of excess contributions being made.
https://www.gov.uk/government/statistics/personal-pensions-tables-7-and-8/commentary-for-personal-pensions-tables-7-and-8
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