The annual amount of tax collected from people exceeding the lifetime allowance has jumped 1,000% since its introduction just over a decade ago, a freedom of information request by Retirement Advantage has revealed.
For the 2006/07 tax year, after the lifetime allowance (LTA) came into effect, the taxman collected less than £10m as a result of people surpassing the limit. For the 2016/17 tax year, that figure had increased to £110m.
Most of the increase has taken place since 2012, when the government began cutting the LTA. After collecting just £20m that tax year, the government’s take from the limit has shot up while the LTA itself has nearly halved, falling from a peak of £1.8m to £1m. On 6 April 2018, it edged up along with inflation to £1.03m.
Retirement Advantage suggested the number of people affected would grow substantially as more people with sizeable benefits start to draw an income.
The LTA represents the maximum amount a pension pot can be worth before an additional tax charge is triggered, while the rate of tax a person pays on pension savings above the LTA depends on how the money is paid to them.
Savers are taxed at 55% if the money is received as a lump sum or at 25% if the money is drawn down in any other way – for example, through pension payments or cash withdrawals.
The number of people hit by both the 25% and 55% additional tax charges has increased over time. In 2006/07, just 160 people incurred an additional 25% LTA tax charge, compared with 1,830 in the 2016/17 tax year. Similarly, while 50 people paid the 55% charge in 2006/07, 580 people did so a decade later.
Retirement Advantage pensions technical director Andrew Tully said the LTA should arguably be scrapped altogether, adding: “The LTA is an arbitrary tax that penalises individuals who have enjoyed good returns on their investments.
“There is also a significant disparity in the way benefits are measured against the LTA, depending on whether the individual is a member of a defined benefit or defined contribution scheme. And with a relatively low cap on contributions to pensions of £40,000 a year, and less for higher earners, there is an argument the LTA should be scrapped.”