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HMRC tax take from Lifetime and Annual allowances soaring

1 October 2018

The amount of tax raised from those exceeding the Lifetime Allowance has soared to £102m in 2016/17 from just £5m in 2006/07, figures released by HM Revenue & Customs show.

Most of the increase has taken place since 2012, when the government started cutting the Lifetime Allowance. The allowance was nearly halved from a peak of £1.8m to £1m, although it has since been increased to £1.03m as of April 2018.

Andrew Tully, pensions technical director, Canada Life, said the numbers paint a stark picture on how the reduction in Lifetime Allowance has impacted savers.

He said: “There is an obvious link to make between the increase in tax take and the slashing of the Lifetime Allowance over the last six tax years. It seems clear that this is just the start and the government’s tax take from the Lifetime Allowance will continue to grow substantially to hundreds of millions each year.”

Tully, who described the Lifetime Allowance as an ‘arbitrary tax’ which penalises individuals who have enjoyed good returns on their investments, has called for the government to consider scrapping the allowance altogether.

He explained: “This would massively simplify pensions for schemes, providers and most importantly, customers, by removing a huge amount of complexity around areas such as benefit crystallisation events.”

Annual Allowance tax take also up

Meanwhile, the total tax raised from the Annual Allowance tax charge has increased from £2m in 2006/07 to £561m in 2016/17. Over the same period, the Annual Allowance has been reduced from £255,000 to just £40,000.

AJ Bell senior analyst Tom Selby said of the findings: “With policymakers scrabbling to find around £20 billion to boost the NHS, it seems inevitable pension tax relief will once again face the Treasury’s steely glare.

“We remain concerned the moving feast of pension tax relief risks putting savers off saving for retirement. If policymakers are to convince people it is worthwhile setting money aside for their later years, they need to engender confidence that the rug won’t be pulled from under people’s feet by a future government.”

The figures did not include a breakdown to show how much was raised as a result of breaching the allowance, how much was down to the tapered Annual Allowance or the money purchase annual allowance. However, Tully said the fact the numbers increased sharply from £179m in 2015/16 to £561m a year later suggested the introduction of a tapered annual allowance for high earners has had a significant impact.

Tully commented: “Even something which sounds as simple as an annual allowance is complicated by the fact we have three different limits – a standard allowance, a very low allowance for those who have flexibly accessed their benefits, and a fiendishly complicated position which reduces the limit for higher earners. This complexity means many individuals may be unintentionally caught by the Annual Allowance.

‘The Lifetime and Annual Allowance don’t affect many people but they are a complicated area of pension planning and it is all too easy to get caught out.”

Steve Webb, director of policy, Royal London, added: “We are now starting to see the multiple cuts to pension tax relief bite on pension savers.  Although relatively small numbers of people are affected, the tax bills are huge.  On Annual Allowance charges alone, the amount of contributions which exceeded the annual limit trebled in a single year up to 2016/17.  These impacts will get bigger as the ability to carry forward higher unused allowances from previous years works its way out of the system.

“Regrettably, the Chancellor will be looking at these figures with great interest as they suggest that pension tax relief could be a rich source of additional revenue for a cash-strapped government.”

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