New HMRC figures reveal that 30,440 pension savers exceeded their annual allowance during the 2024/25 tax year, a 22 per cent increase from the 24,950 who did so the previous year. The data, which covers pension contributions above the tax-relief limit, has sparked concern among financial experts and former ministers, who warn that frozen tax thresholds are dragging more people into higher tax liabilities.
The annual allowance, which limits how much you can contribute to a pension each year while receiving tax relief, was raised from £40,000 to £60,000 by then Chancellor Jeremy Hunt in April 2023 following his Spring Budget. Despite this increase, the number of breaches has continued to climb, with the total value of excess contributions also rising by 33 per cent, according to the same HMRC data.
Pensioners hit by frozen thresholds
The figures have been branded “surprising” because the allowance was raised only recently. However, Sir Steve Webb, a former pensions minister and partner at LCP, points to the broader impact of the government’s fiscal stance. “The constant freezing of tax thresholds and allowances has dragged millions more people into paying higher rates of income tax,” he said. He urged Prime Minister Andy Burnham to act, noting that “frozen personal allowances mean that the number of pensioners paying income tax has also risen steeply, and the tax bill on pensioners is up dramatically.”
Webb added: “In all the discussion about fairness between generations, it is important to remember that pensioners are also paying growing amounts back to the Exchequer, paying around £30billion in income tax on their pensions in the latest figures.” The Prime Minister, Andy Burnham, has so far refrained from bowing to pressure on tax thresholds, despite calls from pension experts and opposition parties.
Why breaches are rising despite higher allowance
David Little, Partner in Financial Planning at Evelyn Partners, said the latest figures show how easy it is for even financially savvy people to make costly mistakes. “These are quite striking increases of 22 per cent in the number of individuals reporting annual allowance breaches and 33 per cent in the total value of contributions above the allowance,” he said. The rise is partly attributed to the fact that the allowance is ‘tapered’ for high earners, reducing the limit for those with income above certain levels.
For most people, the annual allowance is up to £60,000, but for some high earners this may be reduced. The amount you can contribute to a pension each year and receive tax relief on is limited to the annual allowance. The allowance will be ‘tapered’ according to your income, meaning that for every £2 of income above a threshold, the allowance reduces by £1, down to a minimum of £10,000.
Expert advice: plan before the tax year ends
Evelyn Partners argued: “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.”
The HMRC data also shows that the total value of contributions above the allowance increased by 33 per cent, reaching a significant sum. This suggests that not only are more people breaching the limit, but the scale of breaches is growing. For those affected, the tax charge can be substantial, up to 45 per cent of the excess amount, depending on their income tax rate.
Impact on pensioners and the Exchequer
The implications are particularly severe for state pensioners, who are increasingly being drawn into income tax due to frozen personal allowances. The personal allowance, which is the amount you can earn before paying income tax, has been frozen at £12,570 since 2021/22, and this is expected to remain until 2028. As state pensions rise with inflation, more pensioners are crossing the threshold, leading to higher tax bills.
According to HMRC data, pensioners now pay around £30billion in income tax on their pensions, a figure that has risen dramatically in recent years. This trend is expected to continue, putting additional pressure on household budgets for older people, who often have fixed incomes. The government has been urged to address these issues, but so far, no changes have been announced.
What savers should do now
Financial advisers recommend that savers review their pension contributions before the end of the tax year to avoid breaching the annual allowance. This includes checking their income levels, understanding how the taper applies, and making use of carry-forward rules where possible. For defined-benefit scheme members, it is crucial to understand that the value of the benefit increase is what counts, not just contributions.
Sir Steve Webb concluded: “The government needs to recognise that pensioners are not a privileged group; they are also contributing significantly to the Exchequer. Freezing thresholds is a stealth tax that affects millions.” As the pressure mounts on Prime Minister Andy Burnham, it remains to be seen whether he will act to ease the burden on pension savers.
