Tax raised by lifetime allowance increased by 2,000%

Tax raised by lifetime allowance increased by 2,000%

The amount of money raised from those exceeding the lifetime allowance has surged by nearly 2,000 per cent over the past decade.

For the first time HM Revenue & Customs has released figures showing the total tax take from those exceeding the lifetime allowance tax has increased from £5m in 2006/07 to £102m in 2016/17.

Most of the increase has taken place since 2012 when the government started cutting the lifetime allowance from £1.8m to £1m.

Meanwhile the tax raised from those exceeding the annual allowance has increased from £2m in 2006/07 to £561m in 2016/17 - an increase of nearly 28,000 per cent.

Over the past decade the annual allowance has plummeted from £215,000 to just £40,000.

Andrew Tully, pensions technical director at Canada Life, said he expected the government’s take from the lifetime allowance to continue to grow substantially year on year.  

"It seems clear this is just the start, and the government’s tax take from the lifetime allowance will continue to grow substantially to hundreds of millions each year.

"The lifetime allowance is an arbitrary tax which penalises individuals who have enjoyed good returns on their investments.

"There is also a significant disparity in the way benefits are measured against the lifetime allowance depending on whether the individual is a member of a defined benefit or defined contribution scheme."

HMRC’s figures indicated the introduction of the tapered annual allowance in April 2016 increased the tax take from £179m in 2015/16 to £561m in the following year.

The money purchase annual allowance, introduced in April 2015, saw its limit reduced to £4,000 from April 2017

"When the government release the tax raised from the annual allowance in 2017/18 I would expect it to be higher again that the £561m in 2016/17," Mr Tully said.

"The annual allowance tax take has increased massively, especially since the introduction of the tapered annual allowance from April 2016. Even something which sounds as simple as an annual allowance is complicated by the fact we have three different limits. This complexity means many individuals may be unintentionally caught by the annual allowance."

Mr Tully called for the government to consider scrapping the lifetime allowance so that pension schemes are simplified for customers.  

"With a relatively low cap on contributions to pensions of £40,000 a year, and less for higher earners, the government should consider scrapping the lifetime allowance. This would massively simplify pensions for schemes, providers and, most importantly, customers, by removing a huge amount of complexity around areas such as benefit crystallisation events."

The Treasury select committee has also called for the lifetime allowance to be scrapped and replaced with a lower annual allowance.

Gross pension tax relief in 2016/17 is projected to be £38.6b, up from £38.5bn in 2015/16.

This rise is expected to be the result of the introduction of automatic enrolment, which has increased the amount saved into workplace pensions in recent years.

Rachel Vahey, product technical manager at Nucleus, said: "The level of lifetime allowance charge paid had steadily increased over the first 10 years of simplification.