The taxman has issued a warning to self-assessment taxpayers that they are facing huge tax bills of 40 to 45%.
The charges could be imposed on savers who have failed to notify Her Majesty’s Revenue & Customs (HMRC) if they breached the annual allowance, which is currently £40,000.
Breached the limit
From a newsletter to pension schemes it has emerged the taxman knows how many people have breached the limit and has asked pension scheme administrators to warn those individuals to make sure the error is corrected on their next self-assessment tax form.
But experts say the rules around notification are not straightforward or readily understood by all pension savers.
They govern the total saved in any defined benefits package as well as contributions made to any new defined contributions scheme in what is known as a tapered annual allowance.
The rule gradually reduces the allowance of those on high incomes which leaves them more likely to suffer the double hit of an annual tax charge on their savings contributions and a lifetime allowance tax charge on their benefits.
It means that for every £2 over the combined limit £1 of the annual allowance would be lost.
Former pensions minister Sir Steve Webb said: “The shocking saga around the annual allowance for pension tax relief gets worse.
We now have HMRC admitting that they know that people are forgetting to put information about their pension tax bills on their annual return.
“But filling in this tax return question requires individuals to understand the system. Thousands of people could be set to face huge tax bills because they have innocently failed to declare this information on their tax return.”
He warned the consequences of such an oversight could be ‘huge’ with some schemes possibly not being aware of the problem because they are only concerned with the savings the client has with them and may not be aware of additional savings elsewhere.
The omission could lead to the client entering ‘zero’ on their tax return which could leave them open to receiving a ‘significant’ tax bill.
Said Sir Steve: “HMRC needs to get to the bottom of how many people have failed to declare this information and contact them immediately.
“The next government needs to radically simplify the tax relief limits to avoid this sort of situation happening again.”