Pension rules ‘cause confusion’ for higher earners

A restriction on pension contributions for higher earners is "causing confusion for taxpayers", mutual insurer Royal London has warned.

Under the current rules, tax is due on pension contributions when they exceed the standard annual allowance of £40,000.

However, a tapered annual allowance applies to people with a threshold income over £110,000 and an adjusted income of more than £150,000.

For every £2 of income these individuals have over £150,000, their annual allowance is reduced by £1, up to a maximum reduction is £30,000.

Steve Webb, director of policy at Royal London, said he is concerned that many taxpayers affected by this rule could be unaware of it, and may be entering the wrong information on their tax return as a result.

He said members of defined benefit pension schemes were unlikely to know about the taper, as schemes have no way of notifying members when the rule applies to them.

HMRC said the tapered annual allowance only affects a relatively small number of people, and that it is an individual's responsibility to make sure they have declared their income correctly.

Webb said:

"HMRC clearly live in a parallel universe where taxpayers perfectly understand the tapered annual allowance and the way that defined benefit accruals are tested against it.

"A system designed for a world where everyone faces the same £40,000 annual allowance simply does not work in a world where different people have different annual allowances."

Talk to us about the tapered annual allowance.