Wealth managers are reporting a surge in the number of higher earners hit by pension tax charges, as frozen thresholds and complex rules push more people into the annual allowance taper. The taper, which reduces the amount that can be paid into a pension each year without a tax charge, is now affecting a growing pool of savers who may not even realize they are caught.
How the taper works and why it’s biting harder
The annual allowance for pension contributions is £60,000 for most savers. However, for those with adjusted income above £260,000, the allowance is tapered down by £1 for every £2 of income over the threshold, until it bottoms out at £10,000 for those earning £360,000 or more. Adjusted income includes salary, bonuses, and certain employer contributions, making it easier to cross the threshold than many expect.
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The problem is compounded by the fact that the thresholds have remained frozen since the taper was introduced in 2016. As wages and bonuses rise, more people are being pulled into the taper zone. According to data from HM Revenue & Customs, the number of individuals paying the annual allowance charge has more than doubled in recent years, from around 10,000 in 2019-20 to over 24,000 in 2022-23.
Why wealth managers are concerned
Wealth managers say the complexity of the rules is leading to costly mistakes. “We’re seeing clients who inadvertently exceed their allowance because they didn’t account for employer contributions or carried-forward amounts,” says Sarah Jones, a financial planner at a London-based advisory firm. “The tax charge can be as high as 45% of the excess, and it’s often not discovered until the tax return is filed.”
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The issue is particularly acute for those with variable income, such as bonus-heavy professionals or company directors. A single large bonus can push adjusted income over the threshold, triggering a taper that applies to the entire year’s contributions. This unpredictability makes planning difficult, even for those who are aware of the rules.
What this means for affected savers
For those caught by the taper, the consequences can be severe. The annual allowance charge is added to the individual’s tax bill, and if the contributions were made through a workplace scheme, the individual may have to pay the charge from their own pocket, even if they did not receive the full tax relief.
However, there are ways to mitigate the impact. The carry-forward rule allows unused allowance from the previous three tax years to be used, which can provide a buffer in years when contributions are high. Additionally, some may be able to reduce their adjusted income by making charitable donations or using salary sacrifice arrangements for non-pension benefits.
But these strategies require careful planning and a thorough understanding of the rules. “The taper is one of the most complex areas of pension taxation,” says Jones. “Without professional advice, it’s easy to make an expensive mistake.”
What to watch next
With the thresholds still frozen and no sign of change in the near term, the number of affected savers is likely to keep rising. The Office for Budget Responsibility has projected that the number of people paying the annual allowance charge will continue to grow over the next few years, as earnings growth pushes more people over the threshold.
In the meantime, wealth managers advise anyone with income above £200,000 to review their pension contributions and consider whether they might be at risk of exceeding their allowance. “It’s better to plan ahead than to face a surprise tax bill,” says Jones. “The taper is here to stay, but with the right advice, it can be managed.”
