The number of people affected by both the annual and lifetime limits on pension has increased again, according to latest HMRC data, fuelling calls for simplification of these restrictions.
LCP partner and pension tax specialist Karen Goldschmidt says both are progressively catching more and more taxpayers.
She points out that when these limits were first introduced in 2006 they were designed to catch only those with the largest annual and lifetime pension saving.
The annual allowance was revamped in 2010 and set at a level of £50,000. It has since fallen by 20 per cent since then, and there are now lower annual limits for higher earners, and those who have taken taxable cash from their pension.
The Lifetime Allowance (LTA) started at £1.5m in 2006, peaking at £1.8m in 2010/11. This allowance has been reduced by around 40 per cent since then — at a time when there have been real increases in earnings and investments. LCP points out government policy on this issue has been “inconsistent”, with large cuts, freezes, restoration of price indexation and now another long-term freeze.
HMRC figures for the 2018/19 tax year show 34,220 people reported chargeable pension saving above the annual allowance with total excess saving of £817m. LCP says that assuming a typical tax rate of 40 per cent, this has generated £326m for the Exchequer. A total of 4,310 more individuals have been impacted when compared to the year before – an increase of 14 per cent. The average charge per member on this basis would have been £9,549.
LCP says the annual allowance charges are likely to be particularly important in the public sector where most workers continue to build up salary-related pensions and where the generous benefits may mean that workers would do better overall by staying in the scheme and paying an AA charge than by opting out (with no alternative benefit on offer).
It adds that In practice it suspects that there is a lot of under-reporting, from lack of understanding of the complex tax rules, and (for the public sector) well-known scheme data problems.
When it comes to the lifetime allowance the HMRC data shows that in 2018/19, 1,400 paid a 55 per cent LTA charge and 5,730 people paid a 25 per cent LTA charge, making 7,130 cases in total.
This is a slight increase on the 7,030 paying these charges a year earlier, and equates to total revenue to HMRC of £283m – a 5 per cent year-on-year increase.
LCP says that in both cases these figures will understate the true value to the Treasury of the AA and LTA because they only include those who breached the allowances. Others will have reduced their pension saving to avoid breaching these allowances (or to preserve one-off HMRC-granted “protections”) and this will have reduced the cost of pension tax relief to the Treasury but will not show up in these figures.
Goldschmidt says: “The Annual and Lifetime limits were originally designed to catch only those with the largest amounts of pension saving in a given year or with the largest pension wealth over a lifetime.
“But the Treasury has increasingly seen pension tax relief limits as a ‘go-to’ source of additional revenue, especially compared with raising headline tax rates. The current system reflects a stream of salami slicing and knock-on ‘tweaks’. We now have a system subject to constant change and uncertainty, with considerable complexity and with no obvious and coherent rationale. It is time for a fundamental rethink of tax relief limits to come up with a system which is simpler, less distorting and which will stand the test of time.”