The number of high earners caught in the pension tax trap is set to increase by 114,000 by 2032, according to analysis by consultancy Barnett Waddingham. Workers earning more than £200,000 annually lose some of their tax-free annual pension allowance if they make large contributions, under rules maintained by Prime Minister Andy Burnham's Labour government. The tapered annual allowance, originally introduced to limit tax relief for the highest earners, is now snaring a growing number of professionals as frozen thresholds remain unchanged.
Barnett Waddingham's figures, released on 28 July 2026, show that the cumulative increase in affected individuals will reach 114,000 over the next six years. The analysis was conducted for the firm's annual pension tax report, which examines the impact of fiscal drag on retirement savings.
How the Tapered Annual Allowance Works
The tapered annual allowance reduces the amount of pension savings eligible for tax relief for those with a "threshold income" over £200,000 and an "adjusted income" over £260,000. For every £2 earned above the £260,000 threshold, savers lose £1 of their annual allowance. The standard allowance is £60,000, but it can taper down to a minimum of £10,000 for those with adjusted income above £360,000.
To illustrate: an individual earning £250,000 in total income (including salary, bonus, savings interest, and dividends) who contributes £30,000 to a pension will have a threshold income of £220,000. However, if their employer contributes an additional £30,000, their adjusted income reaches £280,000—£20,000 above the £260,000 threshold. This reduces their annual allowance by £10,000 to £50,000. Since total contributions are £60,000, the saver faces an annual allowance tax charge on the £10,000 excess at their marginal rate of income tax.
Impact on High Earners
Sarah Coles, head of personal finance at investment platform AJ Bell, described the tapering as causing "real headaches for high earners attempting to boost their pension savings as they approach retirement." She added: "In some cases, if you get a bonus late in the tax year, it can push you unexpectedly over the threshold and land you with a tax bill out of the blue."
Adam Cole, a financial planner at Quilter, warned that frozen thresholds are dragging more people into complex rules. "Keeping thresholds frozen means more people are being drawn into rules they may never have expected to encounter, adding complexity and creating further barriers to pension saving," he said. "While the tapered annual allowance may be manageable for many affected savers, higher earners are already grappling with the personal allowance taper, frozen tax thresholds and a series of changes to pension taxation."
High earners affected include senior executives, consultants, and professionals in sectors with deferred compensation or large bonuses. The tax charge often arises unexpectedly when year-end bonuses push income above the threshold, leaving savers scrambling to adjust contributions.
Inheritance Tax Double-Whammy
Tyron Potts, a partner at Barnett Waddingham, highlighted a combined effect with inheritance tax. "Inheritance tax is the big one because it presents a double-whammy. If you're suddenly being hit by additional charges [due to tapering] and then you've got inheritance tax charges coming after death, it will require some very careful planning," he said. Potts advised high earners to monitor their income levels and consider using carry-forward rules to manage contributions across multiple tax years.
Government Response
A Treasury spokesperson defended the policy: "The tapered annual allowance ensures the benefits of pension tax relief are targeted fairly towards those who need them most. It remains part of a pensions tax relief system worth over £78bn a year that helps millions of people save for retirement, including through tax relief on pension contributions, employer pension contributions and tax-free investment growth within pension funds."
The Treasury has not indicated any plans to adjust the thresholds or the taper rate, despite the growing number of affected individuals. Critics argue that freezing thresholds amounts to a stealth tax on retirement savings, particularly as wage inflation pushes more workers into higher brackets.
The analysis from Barnett Waddingham underscores the increasing complexity of pension taxation for higher earners under the current government. With thresholds frozen until at least 2032, the number of workers caught in the taper will only continue to rise, forcing many to reconsider their retirement planning strategies.
