Jeremy Hunt’s budget contained several measures to encourage the “economically inactive” back into work and to help parents struggling with childcare costs.
There were also several changes that spell particularly good news for higher earners. But a lot of the measures that will have the biggest impact, starting from next month, are plans that have already been announced, such as the freezing of personal income tax thresholds until 2028. Known as fiscal drag, this will quietly suck many more Britons into paying income tax and push others into paying a higher rate, raising billions for the government. It is also fair to point out that about 21 million people are getting a “pay rise” of about 10% next month: pensioners, universal credit recipients and workers on the minimum or living wage.
The chancellor announced a huge boost to the amounts that higher earners – from doctors to multimillionaires – can put away for their retirement while enjoying the full tax benefits. The government argues it was forced to act because the cap on tax-free pensions has led many professionals, including NHS consultants and GPs, to take early retirement, and there have been predictions that older public and private sector employees would change their behaviour or retire early to avoid being hit by penalties.
To address this, Hunt announced big changes to the main pension allowances. The lifetime allowance limits how much you can build up in pension benefits over your lifetime while still enjoying the full tax benefits, with anything over subject to a tax charge. It applies to all personal and workplace pensions, but excludes the state pension, and was due to be frozen at its current level of £1,073,100 until 2026. Hunt has ripped that up and, instead of increasing it to £1.8m – as had been rumoured – he removed the lifetime allowance charge from 6 April this year, before abolishing it completely in a future finance bill.
At the moment, if you have built up more than the allowance, there is tax to pay on the excess. The penalty is 55% if you take the excess as a lump sum. Growing numbers of older people in generous defined benefit pension schemes (including many higher earners in the public sector) were bumping up against the £1.1m allowance or were worried they soon would. At the moment, someone with a defined benefit pension would trigger the lifetime allowance tax penalty once their annual pension income hits about £53,000, capturing some higher-earning public sector workers in the late stage of their careers.
There is also the annual allowance, which determines the most you can save in your pension pot(s) in a single tax year before you have to pay tax. This was £40,000 but has been increased to £60,000 from 6 April this year. However, that is a still far cry from its 2010-11 level of £255,000. Hunt also tackled another quirk in the system which could put some older people off going back to work. At the moment, someone aged 55-plus who takes money out of their defined contribution pension pot can trigger something called the money purchase annual allowance (MPAA), which slashes how much they can subsequently pay in to just £4,000 a year. This particularly impacts people who have taken early retirement but – perhaps because of the cost-of-living crisis – would now like to start doing some work again and want to be able to take advantage of the opportunity to keep saving into a pension. There had been calls for the MPAA to be upped to £10,000 a year – the level at which it was first set in 2015 – and this is what Hunt did.
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