Andy Springford, Financial Planning Partner at Mazars, on Lifetime Allowance Freeze and Pension Contributions following the Budget
“With the Lifetime Allowance frozen at £1,073,100 until 2026, this is likely to bring a number of people into tax charge territory: even at modest growth levels, having the ceiling frozen for a period of 5 years will certainly catch a number of people out. It is therefore as important as ever that individuals are aware of exactly where all of their pension arrangements sit today, so as not to walk unwittingly into avoidable tax charges.
“The good news is that tax relief on pension contributions has not changed, with the Annual Allowance remaining at £40,000 for individuals with incomes below £240,000.
“With Corporation Tax rates increasing for companies generating profits above £50,000 from 2023 onwards, pension contributions (which reduce a company’s taxable profits) become even more attractive.”
Steven Cameron, Pensions Director at Aegon said: “Freezing the income tax thresholds from next April till 2026 at their 2021/22 levels of £12,570 for basic rate and £50,270 for higher rate means individuals will pay more tax than they would have done had the limits been increased as usual in line with inflation.
“While inflation is currently low, and the uplift this April based on a 0.5% inflation increase, there is the potential for inflation to be higher in future years, possibly resulting from a post lockdown consumer spending spree. This could lead to the freeze having a significant impact. If inflation were to increase from the current 0.5% in 2021/22 to 2.5% for the next 4 years, then over the 4 years to April 2026, the total extra tax paid by someone on earnings of £30k a year could be £644, while those on a £60k salary would have paid £3,312 more.
Most people who are basic rate taxpayers will pay an extra £644 while most higher rate taxpayers will pay an extra £3,312. Those just above the basic rate threshold or around the higher rate threshold may be affected differently.
“Freezing the higher rate threshold will mean over time, more people will pay higher rate income tax at 40% rather than 20%. For those who find themselves crossing that threshold, one way of avoiding an increased tax bill is to increase pension contributions.
Pension contributions are deducted from earned income before income tax is calculated. Currently, someone earning £53,000 would pay 40% income tax on the top £3,000. But if they pay that £3000 into a pension, none of their income will be subject to higher rate tax. Put another way, a £3000 pension contribution costs them just £1,800 out of after tax pay. Seeking financial advice can help individuals organise their savings while also saving tax.”
Andrew Tully, technical director, Canada Life commented: “This measure simply sends the wrong signal to savers trying to do the right thing. It also penalises good investment performance. We already have annual limits on the amount you can save via a pension wrapper and there is a significant disparity between how defined contribution savers and those with defined benefit income are treated for lifetime allowance purposes.
“The lifetime allowance is an arbitrary tax which penalises DC savers. The last 10 years has seen the lifetime allowance fall from £1.8m to £1m; stay frozen at £1m; gradually increase by inflation; and now is frozen again. These continuous changes to pensions policy exacerbate the uncertainty many people feel around pension saving. Instead of constant tweaks we need stability to give people confidence to save for the long-term.”
Raj Mody, Global Head of Pensions at PwC, said:
“Freezing the Lifetime Allowance is on the face of it easier than actively reducing it. But inflation means the implications will be much the same for savers over time, with more and more workers affected.
“The freeze will impact those on defined benefit pensions as well as those on defined contribution pensions, meaning senior doctors and teachers will be caught as much as private sector middle managers.
“Generation X - those currently working in their 40s and 50s and who may have already suffered other consequences from the pandemic - will be directly affected. Someone aged 50 now could be £85,000 worse off in tax by the time they reach retirement, if the Lifetime Allowance stays fixed.
“For defined contribution savers, today’s move goes against the flow of longer working lives. These days people expect to work for longer and one good consequence is there is more time for pension savings to earn investment return. However, a fixed Lifetime Allowance, effectively reducing in real terms, will catch more people when they get to retirement.
“In the scheme of things, this move won’t raise a significant amount in tax revenue - perhaps £300m over five years - given the number of people it will affect directly or indirectly.”
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