HM Revenue & Customs has dropped a £400k legal battle with a pension saver who inadvertently exceeded his lifetime tax-free allowance, making further litigation more likely.
The lifetime allowance, the amount that can be saved before incurring a tax charge, was introduced in 2006 and has since been reduced three times. To avoid pension savers being retroactively penalised by legislative changes, three fixed protections were introduced: £1.8m in 2012, £1.5m in 2014, and £1.25m in 2016.
On November 13 last year, HM Courts & Tribunal Service ruled Gary Hymanson made an honest mistake when exceeding his lifetime allowance after inadvertently continuing to pay into his savings pots. On May 24 it was revealed HMRC would not appeal the decision.
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
Tom Selby, AJ Bell
Mr Hymanson, who has four pensions, was granted a £1.8m protection in 2012 on the basis he cease further payments. But although Mr Hymanson understood he could no longer pay into his main scheme, he did not realise he had to cease payments to two other schemes until 2015.
HMRC revoked his £1.8m fixed protection, resulting in a tax bill of £400,000. Mr Hymanson claimed he made the payments erroneously and appealed the decision.
Mr Hymanson wrote to HMRC in April 2015: “If I had correctly understood that these existing direct debits were also not allowed under the fixed protection regime, I would undoubtedly have told the bank to cancel them.”
The tribunal judge, Philip Gillett, looked favourably on his error. “HMRC did not take into account any possibility that the contracts under which Mr Hymanson continued to make payments to the pension schemes might be void as a result of a mistake,” he said at the hearing in November last year.
He concluded that “this in my opinion was a very relevant factor which they did not take into account”, adding: “I therefore find that HMRC’s decision was unreasonable.”
Judge Gillet’s decision is likely to make further claims more common, according to Tom Selby, senior analyst at AJ Bell. “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,” he said.
An AJ Bell freedom of information request recently found that more than 12,000 investors have notified HMRC they have lost one of the various forms of lifetime allowance protection introduced since 2006.
Mr Selby added that “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”.
