Tax Implications With Pensions: Part 1

The government often aims to encourage individuals to save up for their retirement in order to reduce their dependence on state aid. However, the astronomical spending during the pandemic has led to the government having to ways to trim the fiscal deficit. In 2020, UK government debt crossed 100% of the country’s GDP for the first time in nearly 5 decades. The books might be red at the moment, but chancellor Sunak is already looking at tinkering with pensions to raise funds over the long-term to bring the public finances back onto a stable footing.

Comparisons of allowances and thresholds regarding pensions today with just more than a decade ago accentuates the continuing volatility and interventions which occur in the world of pensions.

The Lifetime Allowance (LTA), which determines the amount individuals can deposit into their pension pots, has deteriorated from £1.8 million back in 2010-11 to just £1.073 million at present. Whilst the allowance has been held at £1.073 million at the most recent budget session, withdrawals in excess of this limit are taxed at 55% if withdrawn as a lump sum and 25% if taken as income.

Further cuts to the lifetime allowance have been viewed by experts as the most likely means by which to raise additional funds. Whilst majority of the working population might never actually breach this threshold, it is an issue of genuine concern for those who have climbed up the ladder in the public sector over  a number of years. The possibility of the middle-class being impacted from a cut to the threshold from £1.073 million to even £900,00 could impact the middle class considerably at a time when the government is seeking to avoid placing excessive burden on them from existent plans for taxes.

Individuals are more likely than not to be offered a transition period, however, to protect their current allowance. Employees approaching their LTA and receiving contributions from their employer might need to consider the potential for paying additional tax once they breach the LTA. Alternatively employers might offer cash payments as a substitute to pension contributions but this will almost inevitably have tax implications with PAYE and NIC deductions being deducted.