The chancellor has been accused of unveiling a £4bn tax giveaway that will benefit the wealthiest people in the UK by dramatically increasing how much they can stash away in pensions while enjoying the full tax benefits.
Jeremy Hunt announced a major shake-up of the rules governing how much people can pay into their retirement pots, which will have no impact on the vast majority of the population but could lead to huge gains for the top few per cent of wealthy, older pension savers. Labour claimed it was a handout for “the richest 1%” and that someone with a £2m pension pot would pay up to £275,000 less in tax as a result.
The government said it had to act because of a pensions “tax trap” that meant it could face a growing exodus of doctors, dentists, teachers and other senior public sector employees retiring early, turning down extra work or deciding not to apply for higher-paid positions.
Others said that while the changes would tackle the issue of 55% tax penalties faced by some doctors and others, they would also give a huge boost to many wealthy individuals.
Hunt ripped up the pensions lifetime allowance, which is the limit on how much people can build up in pension benefits over their lifetime while still enjoying the full tax benefits, with anything over £1.07m subject to a tax charge of up to 55%. It applies to all someone’s personal and workplace pensions, but excludes the state pension, and was due to be frozen at its current level until 2026. Instead of increasing it to £1.8m, as had been rumoured, he abolished it.
The chancellor also increased the annual allowance – which is the most someone can save in their pension pots in a single tax year before having to pay tax – from £40,000 to £60,000.
Budget documents showed that abolishing the lifetime allowance will cost the UK £2.75bn between 2023-24 and 2027-28, while increasing the annual allowance will cost almost £1.1bn, with an associated change adding another £170m to the bill.
David Brooks, head of policy at the independent consultancy Broadstone, said that scrapping the lifetime allowance and increasing the annual allowance was “a huge tax giveaway to the wealthiest people in the country”.
He added: “It is hard to escape the view that this package of measures is a political move … It is overwhelmingly weighted in favour of the richest, who will benefit from significant increases to saving potential.”
James Kirkup, the director of the Social Market Foundation, said: “Abolishing the lifetime allowance will cost the Treasury about £2.75bn over five years, while benefiting only the small group of workers fortunate enough to have pension pots worth more than £1m.”
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He added that that was “a lot of money to allocate to a small number of people with huge pensions – at a time when the government’s own figures show more than 12 million people aren’t saving enough into pensions to deliver a decent retirement”.
Chris Boulet, a partner at Blick Rothenberg, an advisory firm, said: “Abolishing the lifetime allowance maximum amount offers speculative investors a great opportunity for unlimited tax-free growth.”
Blick Rothenberg said that “the secret winners” from the budget were individuals earning more than £300,000. Hidden away in the detail was an increase to the “minimum tapered allowance” to £10,000, up from £4,000, it said. This is the minimum level of tax-relievable pension contributions.