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Savers with £1m+ pensions could be spared six-figure tax bills for rules breach

Savers with £1m+ pension pots who accidentally breach contribution rules could be spared six-figure tax bills, following a key court case.   

The case, which gives hope to others in a similar situation, highlights how savers can face a tax charge of up to 55% for amassing a total pension pot worth more than the 'lifetime allowance' (LTA), now £1,055,000 but previously as high as £1.8m. 

Some savers have been able to retain the higher LTA limit if they made no further contributions to their pensions, by applying to HM Revenue & Customs (HMRC) for so-called 'fixed protection'. 

But in a recent tax tribunal case, HMRC argued that Gary Hymanson, who had failed to cancel a direct debit to his pension plan, should lose his £1.8m limit – even though the breach was accidental.  

The loss of this protection could have left Mr Hymanson facing a six-figure tax bill, as his LTA would drop to the current £1,055,000 level – with a potential tax charge of up to 55% on the amount over this limit.  

The tribunal ruled in Mr Hymanson's favour in November – saying that the accidental nature of the rule breach meant he should retain an LTA of £1.8m – and, after considering fighting the ruling, HMRC has now confirmed it will not appeal the decision.

With Government figures showing more than 12,000 pension savers have lost higher LTA protections in recent years, anyone who has been hit with a tax charge after accidentally breaching the limit could now have a strong case to go back to HMRC.  

For more on pensions, read MSE's pension need-to-knows and our guide to taking a pension.

How does the lifetime allowance work? 

The lifetime allowance (LTA) is the total value of pensions you can build up without facing a tax charge of up to 55% on the excess. This LTA limit is £1,055,000 in the current 2019/20 tax year (having been reduced from a peak of £1.8m in 2011/12), and increases annually in line with inflation.  

Importantly, even if savers stop making pension contributions, subsequent investment growth means they could breach the LTA and face a tax charge.    

Analysis by pension firm Royal London has found that more than one million pension savers could breach the LTA by the time they reach retirement. So it's important to keep an eye on the total value of your pension pot – and if you're in danger of breaching your allowance, get specialist impartial advice.

To stay on top of all your pensions, see our blog for how to keep track by setting up your own pensions dashboard.

‘Those who make genuine errors could be handed a tax lifeline’

Commenting on the implications of Mr Hymanson's case, Tom Selby, senior analyst at pension firm AJ Bell, said: "The fact HMRC appears to have admitted defeat in this case suggests those who make similar genuine errors in relation to their lifetime allowance – errors which in some cases could lead to six-figure tax bills – could be handed a tax lifeline.

"Anyone who has accidentally breached their fixed protection by contributing into a pension in error now has a strong case to go back to HMRC where a tax charge has been applied.

"Furthermore, anyone in future who accidentally breaches their protection – for example by being automatically enrolled without appreciating the consequences – could challenge the loss of the protection and any tax penalty the revenue might try to impose as a result."

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