New HMRC figures show increasing impact of squeeze on pension tax relief – Steve Webb, LCP

Annual figures published this morning by HMRC show how the number of people caught by annual or lifetime limits on pension tax relief rose sharply between 2020/21 and 2021/22.  It was partly in response to the growing impact of these limits that the Chancellor felt forced to relax the rules considerably in his March 2023 Budget.

On the Annual Allowance (which remained at £40,000 in 2021/22 but could be reduced to as little as £4,000 for the highest earners), the figures show:

  • An increase in the number of cases where ‘scheme pays’ was used – this is where a pension scheme (typically a Defined Benefit one) pays the AA charge on behalf of an individual in return for paying a lower pension at retirement;   this is likely to particularly relate to members of public service pension schemes such as NHS doctors;  the figures show a rise from 17,280 to 49,380 in the number of people facing such charges;  the amounts paid on their behalf went up from £202m to £335m;
  • An increase in the number of individuals reporting through their tax return that they made pension contributions in excess of the Annual Allowance and hence triggering a charge;  the number affected went up from 43,870 to 53,330;  their excess contributions (on which an AA charge would be levied typically at 40-45%) went up from £814m to a record £1,213m;

On the Lifetime Allowance (which was frozen at £1,073,100), the figures show:

  • An increase in the number of people incurring LTA charges from 8,820 to 11,660;  the amount paid in charges went up from £391m to £497m (so an average  £43,000 per person, paying a lifetimes charge in one go);

Commenting, Steve Webb, partner at LCP said:

“These figures show why the Chancellor felt forced to act in his March 2023 Budget.  Between 2020/21 and 2021/22 the number of people paying tax penalties for exceeding the annual or lifetime limits on pension tax relief went up sharply, generating hundreds of millions of pounds extra for the Treasury.   One major group affected was senior NHS doctors who could face big tax bills as another year of service in the NHS added significantly to the value of their pensions.  Both Annual and Lifetime Allowance limits have been hitting a wider and wider group of individuals which has added great complexity to the system of pension tax relief and the 2023 Budget changes will therefore make matters a great deal simpler for the widening group that might have been affected”.

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