Autumn Statement  

Autumn Statement tax grab will be keenly felt in pensions

Rachel Vahey

Rachel Vahey

As far as attention-grabbing pension-centric headlines go, this Autumn Statement was a very quiet affair.

Unsurprisingly, there were no announcements of the demise of tax relief on pensions contributions for higher rate taxpayers. However, it had also been widely predicted the lifetime allowance would be frozen at £1,073,100 for an additional two tax years to 2027-28.

And although this seemed much more probable, it too did not happen, despite other tax thresholds being put in the deep freeze until 2027-28.

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It is tempting – but purely conjecture – to think the Treasury backed down because of the pressure it would place on public sector pension schemes, including the NHS schemes.

It is worth remembering, though, the current freeze will have a big effect, especially given the high rates of inflation we will be seeing well into next year.

If the past three inflation rate increases had been applied, as well as the inflation rates forecast for the next two years, then the LTA should be £1,322,700 in 2025-26 – almost a quarter of a million pounds higher than its frozen level of £1,073,100.

Those with pension savings above the current level could have received an extra £62,400 in tax-free cash instead of that amount being sent to HMRC in the form of the LTA charge.

The rumour mill, however, was right on the inflationary increase to the state pension. Next year the full flat-rate state pension will increase by 10.1 per cent to £203.85 a week (£10,600 a year), breaching the £10,000 a year mark for the first time.

The basic state pension, paid to those who reached state pension age before April 6 2016, will increase to £156.20 a week (£8,122.40 a year).

This increase leaves those receiving the full state pension sailing dangerously close to the frozen personal tax allowance. Those receiving a private pension on top may find more of that income tipping into taxation.

HMRC figures show there are now 7.3mn people over state pension age paying income tax, and this will only increase in the next few years.

The minimum income guarantee element of the pensions credit will also increase by inflation, rather than by earnings. This is good news, I think, as those claiming this benefit are some of our poorest pensioners.

The other state-pension-related nugget was that the government’s review of the state pension age will be published in early 2023.

It could possibly recommend an earlier implementation in the rise to age 68 – currently set to increase in 2028 – and even contemplate a rise to age 69 or 70.

If so, this will be a contentious message to impart, especially to younger generations watching their grandparents who retired in their early 60s. Expect a bumpy ride for the Department for Work and Pensions.