Wealthy savers to be hit by pensions tax grab

Jessica Beard
·3-min read
Rishi Sunak - TMG
Rishi Sunak - TMG

Wealthy savers are in the firing line of a Treasury tax grab with the Chancellor expected to freeze the threshold for the pensions “lifetime allowance”.

The allowance places a limit on how much savers can put into pension pots tax free and generally increases with inflation every year.

However, Rishi Sunak is reportedly drawing up plans to impose a stealth tax in the Budget on March 3 by freezing the threshold at its current level – £1,073,100 – until 2024, according to The Times.

Anyone over the limit could be hit with punitive tax charges of up to 55pc. Tens of thousands of people with larger pensions could face additional tax bills of more than £22,000 by 2024.

Number of people breaching LTA
Number of people breaching LTA

Sir Steve Webb, former pensions minister and currently a partner at LCP, a consultancy, said more than a million people of working age will breach the threshold and be subject to the hefty tax bills.

Over 290,000 workers have already have pension wealth above the lifetime allowance but have not triggered the tax charge. Meanwhile, 1.25 million non-retired people are projected to breach the allowance, according to a report by Royal London, the pension provider.

Pension providers generally tell savers how much tax they owe if the lifetime allowance is breached and the bill is deducted before the pension is withdrawn.

Lifetime allowance timeline
Lifetime allowance timeline

The charge is 55pc on savings about the allowance if taken as a lump sum or 25pc if taken as an income. Savers will also have to pay tax at the marginal rate on their income.

The lifetime allowance was projected to increase by £88,900 by the end of this parliament in 2024 if it continued to rise in line with inflation.

Tom Selby, of fund shop AJ Bell, said future generations stand to lose out the most from a freeze, as wealthy pensioners already close to or above the limit will can mitigate paying more tax.

Steven Cameron, of pension provider Aegon, warned the policy would harm many high-earning public sector workers, including doctors, consultants and clinicians who have been working on the frontline during the pandemic.

The threshold translates to an annual retirement income of £53,000 for those with gold-plated defined benefit pensions.

Rishi Sunak has been on the hunt for ways to plug the enormous hole ripped into public finances by the pandemic and is expected to bring in a raft of changes that hit workers’ wallets next week.

Income tax is under review amid rumours officials will scrap planned increases to the £12,500 tax-free allowance and £50,000 higher-rate threshold.

A freeze on personal income tax allowances would raise £6bn and result in tens of millions of people paying more. The average family will pay £250-a-year by 2024-25 than previously forecast.

Landlords and investors could suffer a double whammy as ministers consider increasing the rates of capital gains tax, which is charged on profits from investments and property.

Three times as many people will pay CGT under plans put forward by the Government’s official tax adviser, the Office for Tax Simplification.

Corporation tax could be increased from 19pc to 24pc, which would affect buy-to-let owners that have incorporated as a business. A record number of landlords did so last year after the withdrawing of tax incentives since 2016 made it increasingly unprofitable to own a buy-to-let property.