Lifetime limits on tax-privileged pension saving bite harder just as government considers relaxing the rules

by | Sep 28, 2022

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Figures published today by HMRC show that their estimate of the gross cost of providing tax relief on pension contributions stood at £44.1 billion in 2020/21 – an increase of £2.4 billion from the year before. National Insurance relief cost a further £23.2 billion (up from £21.4 billion). Deducting tax paid by today’s pensioners as well as various pension tax charges gives a net cost in 2020/21 of £48.2 billion, up from £44.5 billion.

HMRC have also published figures which show the numbers affected by annual and lifetime limits on tax privileged saving into a pension.

Lifetime Allowance


in 2020/21 a total of £382 m was paid in charges by 8,610 people whose drawings on their pensions exceeded the Lifetime Allowance (LTA) limit. This is an increase of 11% in the LTA charges paid a year earlier and more than double the amount paid five years ago.

LTA charges arise when an individual ‘crystallises’ a pension scheme benefit which takes their lifetime withdrawals above the limit. Where money is taken out as a lump sum, the charge on any excess is 55% (with no further tax being due). Where money is taken out as regular income, the charge is 25% over and above the retiree’s marginal income tax rate. In 2020/21 £101 m came from charges on lump sums whilst £281m came from charges on withdrawals taken as income.

The decision to freeze the Lifetime Allowance for five years until 2025/26 means that this limit is likely to become much more important over the coming years unless action is taken.


Annual Allowance

HMRC has also published figures for the amounts raised through Annual Allowance charges. The standard rate of Annual Allowance is £40,000 per year, though some individuals will have a lower annual limit, particularly those on higher incomes.

HMRC provide two figures:

  • The actual Annual Allowance charges paid under the ‘scheme pays’ system where pension schemes pay the charge on behalf of the member in return for a reduction in ultimate benefit;
  • The amount of contributions/accrual made by or for individuals in excess of their Annual Allowance and declared on their tax return; the amount of AA charge levied on these amounts depends on the tax rate of the individual but will often be 40%;

The revenue from ‘scheme pays’ charges and the tax due on contributions/accrual above the Annual Allowance both fell in 2020/21. In part this is likely to be because the 2020 Budget implemented a dramatic easement in the thresholds above which the AA is tapered below the standard £40,000 allowance (see ‘notes to editors’ for more details).

The big easements in these thresholds meant that the tax take from these measures fell considerably. The tax charges covered by ‘scheme pays’ went down from £253m to £200m, whilst the amount of contributions declared on tax returns on which AA charges are payable went down from £1000m to £764m. The tax return data is in general more up to date and therefore provides a better guide to the impact of the 2020 Budget change.

Commenting, Karen Goldschmidt, partner and pensions tax specialist at LCP said:


“Even when Lifetime Allowance limits keep pace with inflation we see a steady increase in the number of people being caught and paying LTA charges. But a five year freeze in the LTA threshold until 2025/26, especially at a time of high inflation, is likely to bring many more people into the net of LTA charges and undermine the incentive to save for a pension. If the Government is looking to simplify pension tax relief and make sure that the limits only apply to the very wealthiest, reversing some of the past and planned cuts to the LTA would be a very good place to start”.

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