The number of people whose pension savings exceeded a crucial tipping point has led to them paying often unexpected charges. The pension annual allowance (AA) is the maximum amount that can be paid into your pension savings each tax year without triggering a tax charge.
But the number of people who breached their AA spiked by more than 20% between the 2023/2024 and 2024/25 tax years, official statistics show. Private pension statistics put out by HM Revenue & Customs (HMRC) last week showed 30,440 people reported pension savings exceeding their personalised AA through Self-Assessment, with some potentially facing additional tax charges as a result.
22% increase in breaches
This was up from 24,950 in 2023/24, a 22% increase. Meanwhile, the total value of contributions in excess of the AA reported via Self-Assessment was £672 million in 2024/25, up from £505 million in 2023/24.
David Little, Partner in Financial Planning at wealth management firm Evelyn Partners, said the increase was "quite striking". He explained that the pension's annual allowance is "the maximum amount of tax-free money you can contribute to your pensions each tax year, and the full AA is currently £60,000, as it was in both these tax years".
Surprising rise despite higher allowance
"What is slightly surprising about the figures is that the AA was raised from £40,000 to £60,000 by then Chancellor Jeremy Hunt in April 2023 following his Spring Budget," Mr Little said. "That, you might have expected, would lead to a fall in breaches in the subsequent years as people had more leeway to make large annual pension contributions than they had enjoyed for nearly 10 years," he added.
He acknowledged that the cause is difficult to establish for certain, but a "very plausible one is that more high earners were being surprised by the tapered annual allowance". "Plausible because this was a period of elevated inflation when high earners could easily have lost track of the impact on pension contributions of increasing salaries and bonuses."
Defined benefit schemes and the taper trap
"Also many AA breaches occur within defined benefit schemes where it is harder for employees to keep track of how their pension is tested against the AA, and generous public sector pay deals during this period could have contributed," he added.
But that’s just one potential explanation, and Mr Little said the increase could be down to earners "exceeding the full AA by mistake as their earnings rose or as they sacrificed large bonuses into their pension". "Increased employer contributions and unexpectedly high pension growth within defined-benefit schemes can also drive AA breaches."
"But the taper remains a particular trap because the headline £60,000 allowance can give higher earners a false sense of security," he explained.
Advice for savers
The financial planning expert said the "key" is to "plan before the tax year has ended rather than waiting for a pension statement or tax return to reveal the problem". "Savers should obtain up-to-date pension input figures from every scheme, estimate their total income including bonuses and benefits, and check whether unused allowance can be carried forward from the previous three tax years."
"Defined-benefit members need particular care because the amount tested is the increase in the value of their promised pension, not simply what they have personally paid in."
Mr Little says in situations where a charge on an AA breach can’t be avoided, "savers should establish whether Scheme Pays is available to allow the charge to be paid from their pension scheme, but they should not automatically stop pension saving simply to avoid a tax charge". He warns that losing "valuable employer contributions, tax free growth inside the pension fund or defined-benefit accrual could leave them materially worse off in the long run" and that paying the charge is sometimes the best option.
He added: "What we are seeing here is evidence that pension taxation remains too complex for most people and even financially savvy earners can get caught out. It’s striking how many high earners are completely unaware that their pension allowances are tapered until it’s too late."
HM Treasury, which is responsible for pensions tax policy, has been approached for comment.
