Pension savers face ‘tax trap’

More than 600,000 high earners across Britain could be caught by pension tax rules by 2032, according to new analysis.

It suggests that the number forced to reduce their pension contributions will increase by more than a fifth over the next five years.

The figures were revealed in a Financial Times report, highlighting that the number of taxpayers affected by the pension tapered annual allowance will continue to rise as fiscal drag pulls more people into the system.

HM Revenue and Customs (HMRC) data reveals around half a million earners are already affected by the taper in the current tax year ending in April, according to research carried out for the newspaper by pension consultancy Barnett Waddingham.

And if the thresholds do not change, that figure could climb by 114,000 people by 2032, the analysis shows.

That would take the total number of higher earners caught by the taper to more than 600,000.

The pension tapered annual allowance reduces the amount some higher earners can contribute to their pension while still receiving tax relief. For most taxpayers, the standard annual pension contribution allowance is £60,000.

However, once an individual’s adjusted income, which combines taxable earnings and pension contributions, exceeds £260,000, that figure starts to fall.

The allowance continues tapering until it reaches a minimum of £10,000. And anyone who exceeds their available allowance could face an additional tax charge.

The £200,000 income threshold at which the taper starts has been frozen since 2020.

The standard annual pension contribution allowance was increased from £40,000 to £60,000 in 2023, partly offsetting the impact of the frozen threshold.

Tyron Potts, head of pensions research at Barnett Waddingham, told the Financial Times: “For high earners, annual allowance tapering can swiftly and stealthily erode pension tax relief, so understanding your adjusted income and how the taper applies will be essential to avoiding an unexpected tax bill.”

And he warned that a single bonus or one-off payment could be enough to push someone above the threshold.

However, not all experts see a problem. Sir Steve Webb, former pensions minister and partner at consultancy LCP, told the newspaper: “A combination of a much higher starting allowance and a more gentle taper mean that the impact is marginal for most people.”

And he said that the frozen threshold “is likely to be much less of an issue than it used to be”.

A Treasury spokesperson said: “The tapered only applies to the highest-earning savers, ensuring the benefits of pension tax relief are targeted fairly towards those who need them most.”

Further tax measures affecting pensions are due to take effect in the coming years. From April 2027, unused pension pots will be brought within the scope of inheritance tax for the first time.

The government has also frozen other income tax thresholds, including the point at which personal allowances begin to be withdrawn for those earning more than £100,000.

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