The number of high earners who will face restrictions on their pension contributions due to the tapered annual allowance is projected to rise significantly over the next decade, according to recent analysis. Currently, more than 500,000 individuals with incomes exceeding £200,000 are subject to a reduced cap on the amount they can contribute to their pensions without incurring additional tax charges. This figure is expected to increase by approximately 114,000 by 2032 if the existing thresholds remain unchanged.

Under current rules, most taxpayers can contribute up to £60,000 annually to their pension schemes. However, for individuals whose adjusted income exceeds £260,000—a figure that includes taxable income plus pension contributions—the annual allowance tapers down to a minimum of £10,000. Failure to correctly calculate this tapering can result in unexpected tax liabilities.

Tyron Potts, head of pensions research at consultancy Barnett Waddingham, emphasized the complexity for those caught by the taper. He noted that high earners must carefully assess their pension contributions once they exceed the threshold, as a sudden increase in income, such as a bonus, can unexpectedly reduce their allowance and erode expected tax relief.

The thresholds have not been adjusted since 2020, a deliberate choice by past governments to increase tax revenues from higher earners. Without inflation adjustments, the £200,000 threshold would be equivalent to more than £254,000 today, although average pay growth has outpaced inflation over the same period. In contrast, the standard annual allowance increased from £40,000 to £60,000 in 2023 partly to offset the effects of the frozen taper threshold.

Not all experts view the situation as problematic. Sir Steve Webb, former pensions minister and partner at consultancy LCP, acknowledged that the reductions to the annual allowance during the 2010s adversely affected certain groups, such as senior NHS professionals. However, he argued that the higher starting point for the allowance and a more gradual taper now make the impact “marginal for most people.” Webb suggested that the income threshold freeze is unlikely to pose as significant a challenge as it did in previous years.

The tapered annual allowance was introduced following concerns that pension tax relief was being disproportionately utilized by very high earners, a response that followed the relaxation of pension access rules introduced by then-chancellor George Osborne in 2014. Alongside this, the Treasury has also frozen other income tax thresholds, including the withdrawal of personal allowances above £100,000 of taxable income. This has led to marginal tax rates reaching as high as 62%, a burden most acutely felt by so-called “Henrys” — individuals with high earnings but comparatively less wealth.

HM Treasury defended the policy, stating that the tapered allowance targets tax relief to those most in need by applying only to the highest-earning savers.