Sunak plots billion-pound pensions stealth tax raid in March – ‘attack on multiple fronts’ | Personal Finance | Finance

In last year’s Budget, Sunak froze the pensions lifetime allowance for five years, in a move that will see up to two million savers pay a punitive 55 percent tax charge. Now tax experts say he may come back for more in his Spring 2022 forecast statement on March 23, attacking pensions on a number of fronts.

Sunak launched a raft of stealth taxes in his 2021 Budget last March, freezing income tax, inheritance tax, capital gains tax and lifetime allowance thresholds for five years.

These measures will not be enough to balance the nation’s books, warned Shaun Robson, head of wealth planning at Killik & Co.

“It still leaves a hole to be filled, given the significant additional stimulus policies required by the Government over the course of the Covid-19 pandemic.”

Sunak’s tax attack is already underway: “Already, pension savers are being affected by a freeze in the pension lifetime allowance and a change in the annual allowance tapering for contributions from high earners.”

Sunak could even lower than pensions lifetime allowance again. This once stood at £1.8 million but is now frozen at £1,073,100 until the 2025/26 tax year.

Any pension savings that exceed this level are taxed at a punitive 55 percent, and more people will get caught out as stock markets grow over time.

Incredibly, Robson suggested Sunak might increase the tax rate charged “on funds in excess of the lifetime allowance”.

His tax attack may not stop there.

Every year, the Treasury hands over £41 billion in tax relief on workplace and personal pension contributions, as an incentive for everyone to save for retirement.

This is a huge burden and successive Chancellors have considered slashing it back for years.

Robson said Sunak could slash higher rates of relief for 40 or 45 per cent rate taxpayers, or introduce a flat rate of relief.

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This could be as low as 20 or 25 percent. Somebody who invested £10,000 in a pension and got 40 percent tax relief would currently save £4,000.

If they only got 25 percent relief their saving would fall to £2,500 – a loss of £1,500 for the taxpayer but a handy gain for HM Revenue & Customs.

Robson said the tax grab may not stop there. Every year, savers can pay up to £40,000 in a pension, which is known as the “annual allowance”.

Sunak could cut this allowance to, say, £30,000 or £20,000.

Another option is to make pension pots liable for inheritance tax. “Money purchase pensions are currently considered outside of the taxable estate for inheritance tax purposes,” Robson said.

Many people deliberately hold money in pensions because the funds can be passed on to loved ones free of IHT. It would be a massive blow if that benefit was lost and the money went to HMRC instead.

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Adrian Lowery, personal finance expert at investing platform Bestinvest, is also concerned about the Chancellor’s plans. “We could still see a pensions tax raid this year.”

He said capping pensions tax relief at 20 per cent for everyone could raise £10 billion for the Treasury. “Sunak’s other options would be less controversial but also raise less money.”

Pensions tax breaks are designed as an incentive to save for our future so that we do not end up falling back on the state.

Yet they are not set in stone. They can be slashed at any point, so it may pay to use them while they are still available. This is a complex area so consider taking independent financial advice.