2021 LTA freeze could raise Treasury twice as much as initially anticipated

The decision to freeze the Lifetime Allowance (LTA) at the 2021 Budget could raise twice as much money for the Treasury than originally expected, according to LCP.

LCP estimated that, due to higher-than-expected inflation, the Treasury could raise in excess of £2bn in pension tax due to the freeze.

It was initially anticipated that the policy would cumulatively raise £1bn in the period up to and including 2025/26.

The policy to freeze the LTA at £1,073,100 was introduced when the government thought that CPI inflation would not go above 2 per cent for the period to 2025/26, LCP stated.

LCP noted that the LTA system raises money for the government in two ways: Through those who take pensions that take them over the LTA pay tax charges, with £382m paid in charges in 2020/21, and through some who change their saving behaviour, for example people saving into an ISA rather than a pension and therefore having these savings no longer qualify for ‘up front’ tax relief.

While the eventual yield from freezing the LTA will not be known for several years, LCP estimated that the higher inflation that has already been seen, coupled with likely higher inflation next year than the Treasury expected, means the total impact of the policy could be over £2bn.

“Freezing tax thresholds is a highly unpredictable way of raising revenue for the government,” commented LCP partner, Mike Richardson.

“When there is a surge in inflation of the sort we have seen recently, freezes on tax allowances can generate far more revenue than expected.

“As well as creating unpredictability for the government in terms of revenues, long-term freezes and changes in policy also make it very hard for individuals to make long-term plans for their pensions and savings.”

Pensions Age has contacted the Treasury for comment.

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