In 2012/13, when the annual allowance was £50,000, 3,900 people reported on their tax return that they had saved more than the limit, rising to 7,000 people in 2014/15 when the limit had been cut to £40,000. The number is likely to have risen substantially in 2016/17 when high earners could see their limit tapered down to just £10,000 following rule changes in April 2016. Those who breach the limit will face a tax charge to claw back any tax relief they have received on contributions above the allowance.
However, individuals can save above the annual allowance for any given year and still benefit from tax relief by carrying forward unused allowances from up to three earlier tax years. This means that 2016/17 is the last year for which unused allowances from 2013/14 can be carried forward. As 2013/14 was the last time the limit was £50,000 (before being cut to £40,000 from 2014/15) high earners have little more than a month to use up spare allowances from that year by making pension contributions. After 6th April 2017 any unused allowance from 2013/14 will be lost. But many savers may be unaware how much annual allowance they used up back in 2013/14, especially if they built up rights in a Defined Benefit pension scheme during that year.
Commenting on the figures, Royal London policy director Steve Webb said: “Pension tax relief has been squeezed year after year, and these new figures reveal a big growth in the numbers paying a tax penalty for being over the annual allowance limit. With a big cut in annual allowances for high earners in 2016/17, many more people risk breaching the limit unless they cut back on their contributions or use up unused allowances from earlier years. Savers have just a few weeks to use up spare allowances from 2013/14. It is worth anyone in this position finding out urgently how much they have spare from earlier years and to take impartial advice to help them plan the right level of pension contributions before the end of this tax year”.
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