When Annual and Lifetime limits were first introduced on ‘A Day’ 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 whilst the Lifetime Allowance (LTA) started at £1.5m in 2006, peaking at £1.8m in 2010/11. But both have been dramatically reduced since then:
- The standard Annual Allowance has fallen by 20% since 2010, but there are now even lower limits for high earners and those who have taken taxable cash from a ‘pot of money’ pension;
- Lifetime Allowance policy has been inconsistent, with large cuts, freezes, restoration of price indexation and now another long-term freeze; the level of the LTA has dropped over 40% since its peak; and with real increases in earnings and investments over the last decade, this all means that the LTA is biting on progressively more people;
The publication provides the following information for 2018/19 and it has taken HMRC two years to collate this:
a) Annual Allowance (Table 7)
This shows
- The number of people who chose to have their occupational pension scheme make a ‘scheme pays’ deduction, to cover an incurred Annual Allowance tax charge, and the amount paid to HMRC in these charges;
- The number of people overall who reported chargeable pension savings in excess of the Annual Allowance on their tax return and the amount of those savings; the tax on this ‘excess’ amount will depend on their income tax rate, but will often be 40%;
(Note that individuals are required to report chargeable excess pension savings in their tax return whether they pay the charge themselves to HMRC or whether they have it paid for them by a “scheme pays” deduction, so there is likely to be considerable double-counting between the two columns).
The latest figures show that in 2018/19 34,220 people reported chargeable pension saving above the AA, with total excess saving of £817m. Assuming a typical tax rate of 40%, this would generate £326 million for the Exchequer (with 4,310 more individuals impacted than a year earlier - an increase of 14%). The average charge per member on this basis would have been £9,549.
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). In practice we suspect 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, benefit reviews etc.
In 2018/19 the “tapered Annual Allowance” hit a wider range of high earners, and this explains the growth in numbers affected. In 2020/21 (given the severe and sometimes anomalous impact for doctors) the government made changes so that the tapering now only applies at the highest incomes – so the data in Table 7 will not be a good guide to trends in yield from the Annual Allowance for most recent years.
b) Lifetime Allowance (Table 8)
This shows
- The number of people paying a 55% LTA charge on lump sum withdrawals from pension funds above the LTA, and the amount of the charge; no further income tax is payable on these withdrawals, so in part this charge reflects a ‘bringing forward’ of tax people would otherwise have paid through their retirement;
- The number of people paying a 25% LTA charge on funds above the LTA where they are set up to provide pension income and the amount of the charge paid; this amount is deducted at source and then pension is taxed in the normal way;
The latest figures show that in 2018/19, 1,400 paid a 55% LTA charge and 5,730 people paid a 25% LTA charge, making 7,130 cases in total, up slightly on 7,030 a year earlier. Total revenue to HMRC is £283 million, up 5% from a year earlier.
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 today’s figures.
Commenting, Karen Goldschmidt, partner at LCP said: “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”.
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