You did read the headline right! Normally the question is ‘are you saving enough?’ but Graham Doubtfire, Tax Partner, looks at why many people have been breaching their allowances, and what they can do to improve their planning for long term financial security.
HMRC published some interesting statistics (at least to a tax professional like myself) on taxpayers who had breached the Pensions Annual Allowance and Lifetime Allowances.
At Scrutton Bland we see this within our tax teams and financial planning teams on a regular basis where individuals don't seek advice, particularly for clients who have income that is unpredictable, often a family business owner where thoughts about personal income, both now and in the future, is the last thing on a long list of priorities.
Given that for a lot of people their pension is the next most valuable asset after their home, getting suitable tax and financial planning advice with regard to your pension, and undertaking that planning as early as you can is invaluable.
Why have so many people breached their annual and lifetime allowances?
It will come as no surprise that many people have been saving more over the past eighteen months. The Office for National Statistics has said that savings levels for British households rose to the second highest level on record at the beginning of this year, as people had fewer opportunities to spend.
Many savers have been caught out by the additional tax they have had to pay if they saved more than the Pensions Annual Allowance of £40,000 into their pension pot. Higher earners are especially vulnerable to this, as the £40,000 allowance becomes tapered if you earn more than £240,000 and can reduce to just £4,000 for the highest paid people, particularly relevant to those with variable incomes as set out above.
Added to this, the Lifetime Allowance (the amount that can be saved over a lifetime without incurring large tax penalties) remains at £1,073,100 – and will stay at this until April 2026. This figure sounds a great deal in isolation, but spread it out as an annual saving amount over many years, and it is less impressive. For example: putting in £10,000 for 40 years will take you over the Lifetime Allowance threshold, assuming a modest growth of 4% for your pension pot – a primary reason why individual taxpayers should think about this at an early age.
What happens if I have gone over the limit on my annual or lifetime allowances?
There are generous tax reliefs on pension schemes, but if you go over the upper limit on the Annual Allowance then you won’t receive any tax relief on the excess contributions that you have made in that tax year, and you will be faced with an Annual Allowance charge, which is your responsibility to report under Self Assessment.
The amount that you have exceeded your Annual Allowance by will be added to your taxable income for that year, and you will be charged Income Tax at the current rate that you’re paying. Depending on the nature of the scheme, it is sometimes possible for your pension scheme to pay the charge from your pension, which is known as ‘Scheme Pays’ but this obviously means that your pension would be reduced.
For those who exceed the Lifetime Allowance a tax charge will be levied on their pension fund when they reach certain milestones and dates. Careful planning around those times can mean this charge is avoided or reduced.
What should I do if I want to save more than my Annual Pension Allowance?
There are many useful options for savers who want to build up their pension pot, including carrying forward unused allowances from previous years. There are also tax-efficient wrappers such as ISAs which have an annual limit of £20,000 – one of several such wrappers which provide tax reliefs or advantages.
Over the past 18 months or so, the challenges faced by us all have provided an important reminder that planning for your long-term financial security should be something that takes proper consideration. At Scrutton Bland our tax advisers and independent financial planners work in close conjunction to ensure you can take advantage of the most appropriate solution for you, in order to provide access to resources at important times in your life.