A growing number of high-income earners are expected to be ensnared by pension tax restrictions under Prime Minister Andy Burnham’s Labour government. Over 100,000 workers earning more than £200,000 annually currently face a reduction in their tax-free pension allowance when contributing substantial amounts to their retirement funds.
Analysis by consultancy Barnett Waddingham forecasts that by 2032, the total number of workers caught in this tax trap will rise by 114,000.
This impact stems from the tapered annual allowance, which limits the amount of pension savings eligible for tax relief based on a person’s income. Specifically, those earning above £200,000 lose £1 of their pension allowance for every £2 earned beyond the threshold.
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Sarah Coles, of investment platform AJ Bell, explained that this tapering can cause “real headaches” for high earners seeking to enhance their pensions close to retirement age. She noted, “In some cases, if you receive a bonus late in the tax year, it can unexpectedly push you over the threshold, resulting in an unforeseen tax bill.”
For instance, an individual earning a total of £250,000-including salary, bonuses, savings interest, and dividends-who pays £30,000 into their pension, has a threshold income of £220,000. If their employer also contributes £30,000, their adjusted income rises to £280,000. This is £20,000 above the tapered allowance threshold of £260,000, reducing their annual allowance by £10,000 to £50,000.
Given a total pension contribution of £60,000, the individual would typically owe Income Tax on the £10,000 exceeding the allowance, known as the annual allowance tax charge.
Adam Cole of Quilter highlighted concerns over the frozen income thresholds, stating, “Keeping thresholds frozen means more people are drawn into rules they may never have expected, adding complexity and creating further barriers to pension saving.” He also pointed out that higher earners are already managing the personal allowance taper, frozen tax thresholds, and various pension tax changes.
Tyron Potts from Barnett Waddingham warned about additional financial challenges, saying, “Inheritance tax compounds the issue; being hit by extra charges due to pension allowance tapering and then facing inheritance tax after death necessitates very careful planning.”
A Treasury spokesperson defended the current system, stating, “The tapered annual allowance ensures pension tax relief benefits are targeted fairly towards those who need them most. It remains part of a pensions tax relief system valued at over £78 billion annually, helping millions save for retirement through tax relief on contributions, employer contributions, and tax-free investment growth within pension funds.”