The number of people breaching the pensions lifetime allowance has risen dramatically after strong investment returns pushed more savers over the cap, new figures have shown.

The lifetime allowance punishes those who have too much in their pension pots with a tax charge of up to 55pc.

Newly released figures from HM Revenue & Customs showed the number of people falling into the lifetime allowance trap was already rising before the Chancellor’s controversial decision to freeze the allowance last year.

There was a 21pc increase in the value of lifetime allowance charges reported in 2019-20 to £342m, from £283m in the previous year.

HMRC said reductions to tax allowances since 2010 had resulted in a “significant increase” in the number of people breaching the cap.

Becky O’Connor, of the fund shop Interactive Investor, said: “People are contributing more to personal pension schemes and therefore benefiting from more tax relief through their working life, which is a good thing. 

“However, the flipside of this apparently positive picture, particularly for higher earners or those drawing an income or approaching retirement, is the risk of being caught by lifetime allowance charges.”

Unlike Isa savings, where only contributions are capped, the lifetime allowance applies to the overall size of a pension pot. This means rising stock markets can push investors above the limit.

Last year the Chancellor, Rishi Sunak, froze the allowance at £1,073,100 for five years. In real terms, inflation at its current rate will effectively wipe £278,740 off the allowance by 2025.