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HMRC Lifetime Allowance tax take up by 2,100% in decade

18 March 2018

The reduction in the lifetime allowance led to a 2,100% increase in the government’s tax take in 2016-17 compared to the 2006-07 tax year, according to Old Mutual Wealth. 

In 2016-17, the government collected £110m from 2,410 people who exceeded the lifetime allowance of 1m. Since 2006, there has been a 1,047% increase in the number of people hit by the lifetime allowance from 210 to 2,410, a freedom of information request by Old Mutual Wealth found.

While the lifetime allowance was designed to be a tax on those earning the most, it captures a lot more people, the wealth management firm warned.

Ian Browne, pension specialist at Old Mutual Wealth, commented: “On the outset a lifetime allowance of at least £1 million seems completely reasonable. Once they hear such a large figure people are likely to tune out, convinced it will have nothing to do with them.  This underestimates the power of compounding interest, investment, tax-free growth and continual pension contributions. As a long term investment, what might seem like a modest amount, could exceed the allowance by the time you start to withdraw. People should not mistake that the lifetime allowance is just a concern for the top 1%. In fact, the allowance would need to go up to over £4.5 million if it were just to impact the top percent of the population.”

Old Mutual Wealth said if a 35 year old earns £57,000 per year and contributes 15% of their salary into their pension, they will exceed the allowance by the time they are over 70.  According to figures by the Office for National Statistics, over 10% of full-time employees  earned more than £57,000 in 2017.

Browne says investors should concentrate on planning ahead, making use of other allowances such as Capital Gains Tax allowance, ISAs and the dividend allowance. In addition, spouses and partners will also have a lifetime allowance so in some cases, it may be worth investing in their pension rather than exceed the lifetime allowance.

He added: “For those who are already approaching the LTA they should check if they are eligible for fixed or individual protection 2016. Individual protection is only for those who had savings of at least £1m in April 2016, when the allowance was lowered from £1.25m to £1m. The protection allows savers to retain the lower of your pension value at April 2016 or £1.25m. There is no minimum pension value required for fixed protection, which also allows you to keep the £1.25m allowance. But making any new pension contributions after April 5 2016 voids the protection and your allowance will go back to £1m.”