Calls for Reform as Thousands of Savers Caught in Pensions Tax Trap
Pensions Tax Trap
The pensions tax system has been called for a review after it was revealed that the number of savers breaching their annual and lifetime allowances increased again in 2018-2019. This means they’ve been forced into a pension tax trap with the potential to seriously impact their overall pension pot. So what exactly is happening?
Pension Contributions Exceed Annual Allowance
Pensions give people peace of mind that they’ll have a more financially secure retirement. A certain amount of contributions can be made before tax is applied. However, data from HM Revenue and Customs published on 30 June 2021 showed that in 2018/2019, 34,220 taxpayers reported that their pension contributions exceeded their annual allowance via their self-assessment forms, with total excess savings of £817m.
This was down on the £912m in contributions exceeding the allowance in the previous year. However, the number of people caught by the annual allowance was up by 14%, from 29,910 in 2017-18 to 34,220 in 2018-19. In the previous year, it had already risen by 60%.
Calculations have also revealed that if a typical tax rate of 40% was assumed, this would generate £326m for the Exchequer – with 4,310 more individuals impacted than a year earlier. The average charge per member on this basis would have been an eye-watering £9,549. This new data will represent an enormous worry for pension savers throughout the country who have saved for years to then be taxed for their good behaviour.
Lifetime Allowance Freeze Announced
As part of the 2021 Budget, Chancellor Rishi Sunak made it clear that the lifetime allowance would stay at its current level of £1,07,100 until April 2026, instead of increasing in line with the consumer price index. This has been seen by some as an aggressive tax raid on pensions which will result in more people being caught out with large tax bills in the future. As pensions are a long-term product by their very nature, it’s been deemed unfair to constantly move the goalposts and put people in difficult situations. More and more people will be affected by this decision and therefore there are calls to simplify the pension tax system.
If you’re worried about exceeding your annual or lifetime allowances and have concerns regarding the tax you might need to pay, it’s wise to seek the help of professional accountants. After all, the lifetime allowance charge can be potentially mitigated by either avoiding the charge, deferring part of the charge or potentially reducing it. The route taken will depend on the individual circumstances of each client and a full consultation is required.