HMRC's stealth pension tax 'dragging' thousands of retirees into paying more
Analysts are sounding the alarm over the stealth tax raid pushing tens of thousands of retirees into paying more tax on their hard-earned pension savings.
New HM Revenue and Customs (HMRC) data has found that 30,440 pension savers exceeded their annual allowance during the 2024/25 tax year, marking a 22 per cent increase compared with the 24,950 who did so the previous year.
The value of contributions made beyond the permitted limit jumped even more sharply, climbing 33 per cent from £505 million to £672 million over the same period.
This surge has drawn attention from wealth management firm Evelyn Partners, which identified the figures in a government report as evidence that one of the tax system's most bewildering rules continues to catch growing numbers of people off guard.
Rather than resolving the problem, the higher threshold appears to have done little to shield savers from the more complex elements of the pension tax regime that continue to ensnare them.
A key factor behind the growing number of breaches is the tapered annual allowance, which applies to those earning above certain thresholds.
Individuals whose threshold income exceeds £200,000 and whose adjusted income surpasses £260,000 see their allowance progressively reduced.
For each £2 of adjusted income above that ceiling, the allowance shrinks by £1, potentially dropping as low as £10,000. Crucially, many savers are unaware that pension contributions made by their employer are included in the calculation.
A bonus, salary increase or more generous workplace pension arrangement can inadvertently drag someone into the taper zone without their knowledge.
Unlike PAYE tax, the revenue authority has no mechanism to alert savers in real time when their contributions have crossed the threshold.
The onus falls entirely on individuals to identify and declare any breach through Self Assessment. This means some people only become aware they have over-contributed two or even three years after the fact.
By that stage, reversing the pension contributions is typically no longer an option, leaving them exposed to a substantial backdated tax bill.
The absence of any early warning system effectively turns what should be a straightforward compliance matter into a costly trap for those who fail to monitor their position closely.
Sir Steve Webb, a former pensions minister and partner at LCP, said: "The constant freezing of tax thresholds and allowances has dragged millions more people into paying higher rates of income tax.
"The flip side of this is that when they pay into a pension they get more tax relief, leading the cost of tax relief to soar. But frozen personal allowances mean that the number of pensioners paying income tax has also written steeply, and the tax bill on pensioners is up dramatically.
"In all the discussion about fairness between generations, it is important to remember that pensioners are also paying growing amounts back to the Exchequer, paying around £30billion in income tax on their pensions in the latest figures."