In the 2018/19 tax year, the pension lifetime and annual allowances were breached by more people than in the previous tax year.

Tax charges with a value of £817 million were triggered when a total of 32,440 people reported saving more in their pension pots than the 2018/19 annual allowance of £40,000.

This represented a 14% increase on the previous tax year, when 29,910 savers exceeded their annual pension allowance.

When savers breach their annual allowance they have the choice to pay the tax charge either through self-assessment or through an accounting-for-tax (AFT) return.

The 2018/19 tax year saw a significant increase in the number of AFT returns submitted, accounting for £209m of the annual allowance charges - up 71% on the £122m reported in 2017/18.

Andrew Tully, Technical Director at Canada Life, said:

"Even something which sounds as simple as an annual allowance is complicated by the fact we have three different limits.

"This complexity means many individuals may be unintentionally caught by the annual allowance, although this should ease in more recent tax years due to the rise in the tapered annual allowance threshold."

Caught out by lifetime allowance

During the same period there were more savers also caught out by the lifetime allowance and the tax charges for doing so grew over this time by 6% from £269m to £283m.

In 2018/19 the total amount of pension that could be drawn from a pension pot was £1.3m.

Funds drawn as a lump sum over this limit attracted a total charge of 55%, with a 25% charge applied when excess funds were taken as retirement income, which was taxable at the marginal income tax rate.

On this, Tully added:

“Interestingly, most savers chose 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%.

“Freezing the lifetime allowance [at £1,073,100] for the next five years will mean more and more people will get caught by this relatively arbitrary figure.”

NHS staff opting out of pension schemes

We have reported before on NHS staff being particularly affected by these charges; the rigid structure of the NHS defined benefit pension scheme, combined with the tapered annual allowance, means it can take only a small increase in income before NHS medical staff are hit with a large tax bill.

If a high net-worth individual's threshold income is over £200,000 and their adjusted income is more than £240,000, the taper applies at a rate of 50% on excess income down to £4,000.

Because of the likelihood of them being affected by these tax charges, many high-earning doctors and medical professionals are leaving the NHS pension scheme.

In the 2019/20 tax year, a total of 50,399 NHS workers opted out of the scheme, up 22% from the previous year when 41,219 left.

Since the tapered annual allowance system was introduced in 2016, about 180,000 staff in total have left the scheme.

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