AJ Bell press comment – 28 September 2022
- The net cost of pension tax and National Insurance (NI) relief hit £48.2 billion in 2020/21, up from £44.5 billion in 2019/2020, new HMRC data reveals (Private pension statistics commentary: September 2022 - GOV.UK (www.gov.uk))
- Over half (52%) of tax relief is estimated to be provided at the higher rate, with 42% at the basic rate and 6% at the additional rate (see below graph)
- The decision to hike the earnings level at which the annual allowance taper kicks in, meanwhile, saw both the number of paying an annual allowance charge and the value of those charges fall
- Total value of annual allowance charges down 23%, from £1.25 billion in 2019/20 to £964m in 2020/21
- Total number of people exceeding the annual allowance down 12%, from 66,080 in 2019/20 to 58,130 in 2020/21
- Total value lifetime allowance charges over the same period increased 11%, from £344 million to £382 million
Tom Selby, head of retirement policy at AJ Bell, comments:
“The cost of incentivising people to save for retirement is, on the face of it, eye-watering, with the ‘net’ annual bill – taking into account tax raked in from pension withdrawals – rising to £48.2 billion, up 8% from £44.5 billion in 2019/20.
“However, it’s worth remembering this cost simply reflects the fact that millions more people are saving for retirement, with automatic enrolment in particular dramatically increasing the number of savers in the UK in recent years.
“While average contributions will still need to be boosted at some point, the fact more people are saving something for retirement – and the consequent increase in pension tax relief costs – should be celebrated.”
Annual allowance charges drop after taper tweak
“The cost of pension tax relief is primarily controlled through two allowances – the annual allowance and the lifetime allowance.
“Confusingly, there are three different versions of the annual allowance: the standard annual allowance, set at £40,000; the money purchase annual allowance (MPAA), set at £4,000; and the tapered annual allowance, whereby your annual allowance can be reduced to as low as £4,000 depending on how much you earn.
“In 2020/21, 58,130 people paid annual allowance charges, down 12% from 66,080 the previous year. The value of those charges also dropped by a whopping 23%, from £1.25 billion to £964 million.
“This came as a result of a £90,000 increase in the earnings level at which the taper kicks in in April 2020, introduced in response to strains being placed on the NHS by the policy.
“Lifetime allowance charges, meanwhile, have risen 11%, from £344 million to £382 million year-on-year. HMRC says this increase is likely driven by more people taking their excess as a lump sum and paying a 55% lifetime allowance charge, rather than the 25% charge associated with taking the excess as income.”
Source: HMRC
Source: HMRC
Source: HMRC
