One honest mistake could land you with a huge bill from HMRC

To make things more confusing, there are two types of protection – “individual” and “fixed”. With the former you can continue to save, but you cannot with the latter.

The penalties for exceeding the lifetime allowances are severe. If you take the extra money as cash or pension withdrawals it will incur a 25pc tax rate.

Withdraw it as a lump sum and this jumps to 55pc.

This is what happened to Gary Hymanson, who ended up in court fighting HMRC.

Mr Hymanson took out fixed protection on his £1.8m pension savings in 2012, but failed to cancel a standing order that automatically moved money into his retirement funds.

He had four pensions, and understood he could not make any further lump sum contributions to his main scheme, but told the tax tribunal he did not understand direct debits to his two other pensions also had to stop.

As a result, Mr Hymanson did not notify the bank to stop monthly contributions until April 2015.

HMRC argued the error meant he should lose his protection, and so pay a tax rate of up to 55pc when he comes to withdraw his savings.

The court heard Mr Hymanson relied heavily on other people to advise him in respect of financial matters as he had no knowledge of these things himself.

Judge Philip Gillett said: “I found Mr Hymanson to be a very honest and open witness who fully acknowledged that he did not understand all the subtleties of the issues involved and that he could not clearly remember his thinking at the time, which was over six years previously.” The judge agreed with Mr Hymanson’s argument that he’d made a genuine error and the fixed protection should remain. HMRC would not rule out appealing the decision. At stake is an extension of the taxman’s “genuine error” rules. HMRC told Mr Hymanson it would only agree a person had not lost fixed protection if he had told the bank to stop the payments and the bank failed to act. Tom Selby of AJ Bell, the pension company, said: “Broadly speaking HMRC’s genuine error rules are designed to allow contributions to be refunded when there was no intent for them to be paid. “This ruling potentially extends this to allow refunds where someone forgot to cancel contributions, which HMRC currently wouldn’t accept as a genuine error.” Mr Selby said the case also shows how aggressively HMRC is chasing people for taxes, even in circumstances where they have made an honest mistake. “It feels grossly unfair to hit someone with a massive tax bill when they have made a genuine mistake, so the Court’s decision feels pragmatic in this case,” he said. “It wouldn’t be surprising if HMRC challenged this ruling given the significant sums involved.” The penalties for breaking the lifetime allowance are severe. Taking the extra money as a lump sum will invite a hefty tax bill