Higher earners in the United Kingdom are being cautioned about the risks associated with the tapered annual allowance in pension tax rules, as recent data from HM Revenue & Customs (HMRC) reveals a significant rise in the number of savers facing tax charges for exceeding their pension contribution limits.

According to HMRC figures released this week, the number of individuals declaring pension contributions above their personalized annual allowance through self-assessment increased by 22 percent in the 2024-25 tax year, reaching 30,440 people compared to 24,950 the previous year. This rise comes despite an increase in the standard annual allowance from £40,000 to £60,000 in April 2023. The total value of excess contributions subject to tax charges jumped by one-third, from £505 million to £672 million.

Financial advisers attribute this trend largely to the complexities of the tapered annual allowance, a feature of the pension tax system designed to reduce the annual allowance for higher earners. The taper is triggered when an individual’s threshold income exceeds £200,000 and adjusted income surpasses £260,000. For every £2 of adjusted income above the £260,000 threshold, the annual allowance is reduced by £1, with a minimum allowance set at £10,000.

Adrian Murphy, chief executive of Murphy Wealth, highlighted how unexpected changes in income—such as bonuses or commissions—can lead to inadvertent breaches. He also pointed to complications involving defined benefit schemes and misunderstandings around carry-forward rules as common factors contributing to the problem. “The tapered annual allowance continues to catch them out,” Murphy said.

David Little, a chartered financial planner with Evelyn Partners, emphasized that the taper often misleads higher earners due to the headline £60,000 allowance figure. He noted that the calculation of adjusted income includes employer pension contributions, meaning individuals may exceed their limits even if their personal contributions appear moderate. Little added that variability in earnings, bonuses paid late in the tax year, and contributions to multiple pension schemes contribute to the difficulty of forecasting pension allowance usage until late in the tax year, complicating any corrective action.

Those who exceed their annual allowance are required to pay tax on the excess amount at their marginal income tax rate. The tax charge may be settled either directly by the individual or through their pension scheme.

Experts advise that preventing penalties requires proactive planning well before the tax year ends, rather than waiting for pension statements or tax returns to identify overcontributions. Early assessment and management of pension contributions and income fluctuations are seen as critical to avoiding unexpected tax bills under the tapered annual allowance rules.