Pension tax could hit more Britons as allowance frozen until 2026 | Personal Finance | Finance

The Lifetime Allowance (LTA) threatens to impact the pension savings of more savers as it will remain frozen for years to come. Britons should familiarise themselves with the allowance to reduce the risk of breaching it.

What is the Lifetime Allowance?

The Lifetime Allowance caps the maximum amount someone can save into their pension without being hit with a tax charge.

The tax charge associated with exceeding the LTA could be a hefty one, potentially as high as 55 percent.

An individual’s fund is generally tested when they draw their pension, reach age 75, or on death, to determine whether they are under or over the LTA.

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It was announced last March by Chancellor of the Exchequer, Rishi Sunak that the limit would remain frozen at the current rate until at least April 2026.

This may mean more people are dragged above the threshold in years to come as wages rise over time.

Figures from HMRC have shown an increase in the number of Britons falling foul of the LTA in recent years, and some fear this could worsen as the limit stays at £1,073,100.

Some 8,500 pension savers breached the Lifetime Allowance in the 2019/20 financial year.

Two more increases followed, taking the LTA to £1.75million by 2009/10 and £1.8million the following year.

The £1.8million mark still represents the highest level the allowance has ever been at.

However, the LTA was reduced to £1.5million in the 2012/13 tax year and has since continued to drop.

It bottomed out at £1million in the 2016/17 and 2017/18 tax years, before eventually improving slightly to today’s level of £1,073,100.