Lifetime allowance tax take increases by 2,000% to £102m

Written by Jack Gray
28/09/2018

The total tax take from the lifetime allowance (LTA) tax charge has increased by more than 2,000 per cent in 10 years to £102m, according to the latest data from HM Revenue and Customs (HMRC).

Between the 2006/7 and 2016/17 tax years, the LTA tax take from personal pensions increased from £5m to £102m, as a result of the government consistently lowering the LTA value eligible for tax relief since 2012, from £1.8m to £1m.

In the past year alone, the LTA tax take increased from £66m to £102m and the number of cases of pension schemes paying taxes after exceeding the LTA increased from 1,180 to 2,120.

Furthermore, the amount of personal pension tax HMRC has received through the Annual Allowance (AA) tax charge also increased drastically over the past 10 years, from £2m to £561m. The government has cut the AA value eligible for tax relief from £255,000 to £40,000 since 2010/11.

However, it seems that the main catalyst for the high AA tax take increase was the introduction of the £10,000 tapered AA minimum in April 2016, as the tax take has increased by £382m since then.

AJ Bell senior analyst, Tom Selby commented: “The introduction of the money purchase annual allowance (MPAA) and the hideously complex annual allowance taper for higher earners have further restricted the tax perks available to savers – and will inevitably boost the Treasury’s coffers.

“With policymakers scrabbling to find around £20bn 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.”

HMRC’s data shows that the changes to the LTA and AA have resulted in a £186m boost for the Treasury in the past year and the number of individuals impacted increased from 7,150 to 18,930 during the same period.

Additionally, the MPAA was reduced from £10,000 to £4,000 in April 2017, but are yet to see the impact of this, although it will inevitably increase the AA tax take further.

The report also highlighted that the number of self-employed saving for retirement increased slightly last year to 360,000, although this is still a drastic reduction from 10 years ago when the figure stood at 950,000.

The self-employed average annual contribution fell from last year’s level of £5,310 to £4,490, while the average employee annual contribution also dropped during this period, from £2,570 to £2,310.

Hargreaves Lansdown senior analyst, Nathan Long said: “The last decade has seen a hollowing out of the self-employed saving for retirement. While the number of people working for themselves continues to rise, it’s a smaller number of wealthier self-employed who remain steadfastly saving through a pension.

“The plight of the self-employed, highlighted in this latest data is a further reminder that too many people are still missing out on saving for retirement despite the success of the auto-enrolment regime.”

One main issue facing savers is the complexity of the rules, especially the tapered AA. The taper is a reduction to the standard £40,000 annual pension contribution allowance, based on an individual’s total income for the tax year. £1 of AA is withdrawn for every £2 of income above £150,000. Once adjusted income exceeds £210,000, the AA bottoms out at £10,000.

The definitions of income includes variable payments such as dividends, bank interest, rental income, bonuses and unapproved share schemes. It must also account for employer pension contributions. As a consequence, it is extremely challenging for an employer to know an employee’s total income in advance of the end of the tax year and provide assistance.

Canada Life pensions technical director, Andrew Tully concluded: “Even something which sounds as simple as an AA 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 AA.”

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