Pension savers have been hit hard by tax charges, according to the latest Government figures.
The amount of tax charged for people breaching the lifetime allowance (LTA) and annual allowance (AA) limits rose to an eye-watering £283m for the tax year 2018 to 2019.
The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn from pension schemes – whether lump sums or retirement income – and can be paid without triggering an extra tax charge.
Your annual allowance is the limit on the amount of pension savings that can be made to all your pension schemes in a tax year before you have to pay tax on them.
The lifetime allowance for most people is £1,073,100 in the tax year 2021/22.
The allowance applies to the total of all the pensions you have, including the value of pensions you have through:
- any defined benefit (final salary or career average) schemes you belong to,
- any savings you have in defined contribution pensions, but excluding your State Pension.
The standard lifetime allowance will be £1,073,100 until at least the tax year 2025/26.
The figures for the lifetime allowance charge, recently published by HMRC, was up six per cent from £269m in 2017 to 2018. This represents the single biggest amount clawed back in one year since the introduction of the allowance in 2006.
The total value of AA charges also reported by schemes in 2018 to 2019 was £209m, a 71 per cent increase from £122m in 2017 to 2018.
The total value of contributions reported as exceeding the annual allowance was £817m in 2018 to 2019, decreasing from £912m in 2017 to 2018 and £584m in 2016 to 2017.
The data shows that 34,220 taxpayers reported pension contributions exceeding their annual allowance through self-assessment in 2018 to 2019. They paid an average charge of £23,874.
About 80 per cent of savers choose to pay a 25 per cent lifetime allowance charge, preferring to leave the money in the pension scheme, rather than withdraw as a lump sum which would have incurred a 55 per cent charge.
Since the lifetime allowance hit an all-time low of £1m in 2016 to 2017, the lifetime allowance was increasing each year by the change in the Consumer Price Index (CPI).
In the March Budget this year, Chancellor Rishi Sunak announced that he would freeze the lifetime allowance at £1,073,100 until at least 5 April 2026. The HM Treasury predicts that this will raise an additional £1bn in tax by 2026.
There are fears that the lifetime allowance threshold will drop further to around £800,000 or £900,000 which would mean that more pension savers will be caught by the tax charge.
For more information or advice on issues related to pensions, please get in touch with your Seymour Taylor representative or contact us on firstname.lastname@example.org 01494 552100.
This blog is for guidance only, professional advice should be obtained before acting on any information contained herein. The information was correct at time of publishing 9 July 2021.