The Treasury is set to double its profits from pension tax relief as inflation surges far beyond expectations
, where some of the money that would have gone to the Government as tax goes towards your pension instead, is currently limited by a lifetime allowance.
Where the excess is taken in the form of a regular income, the allowance charge is 25 per cent – on top of regular income tax – while on lump sum withdrawals the allowance charge is 55 per cent, although no further tax is due.Firstly, from those who draw out pensions which take them over the allowance pay tax charges. In the latest year for which figures are available, 2020/21, £382m was paid in charges.
The table below shows the expected annual yield from the change, totalling just under £1bn over the period 2025/26.However, these policy costings were produced at a time when inflation was assumed to be two per cent or less in each year up to 2025. Although the eventual yield from the policy will not be known for several years, LCP has estimated the higher inflation we have already seen, combined with higher inflation next year than the Treasury expected, means the total impact of the policy just in the period the Treasury analysed above is likely to be in excess of £2bn rather than the £1bn as originally assumed.
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