Jeremy Hunt’s ‘bizarre’ ditching of pension limit ‘widens inheritance loophole for wealthy’ | Budget 2023
Jeremy Hunt’s budget decision to scrap the limit on pensions savings has been criticised as “bizarre” by the UK’s leading economics research institute, which says it creates an unjustified extra inheritance tax loophole for high earners that should be closed as soon as possible.
The Institute for Fiscal Studies (IFS) says that following last week’s budget many people on high incomes will now be able expand their pension pots in order to pass on hundreds of thousands of pounds more to their loved ones, tax free, when they die. The IFS says the purpose of pensions savings should be to fund retirement incomes not to escape tax.
In the budget, Hunt abolished the pensions lifetime allowance, which is the limit on how much people can build up in their pots over their lifetime. Previously, anything over £1.07m was subject to a tax charge of up to 55%. The limit applied to all personal and workplace pensions but excluded the state pension, and was due to be frozen at its current level until 2026. Instead of increasing the allowance, as had been expected, the chancellor scrapped it altogether.
He also increased the annual allowance – which is the maximum someone can save in a pension pot in a single tax year before having to pay tax – from £40,000 to £60,000.
The Treasury says it acted because the lifetime allowance led many professionals, such as NHS consultants and GPs, to retire early on reaching the limit, creating a staffing crisis.
Official budget documents show that abolishing the lifetime allowance will cost the Treasury a total of £2.75bn over five years. Isaac Delestre, research economist at the IFS, said the whole policy of exempting pensions savings from inheritance tax was wrong and should be reformed by government.
“Whatever you think of inheritance tax, a situation where the tax system treats pensions more favourably as an inheritance vehicle than as a means of providing income in retirement is bizarre,” he said.
“Abolishing the lifetime allowance has definite upsides but it will also open the door to larger pension pots being passed on tax-free at death. A wealthy individual dying with £2m in their pension – not implausible under the new rules – could reduce their inheritance tax bill by as much as £370,000 compared to a world where only £1.07m of their wealth is in a pension.”
Meanwhile, after Labour criticised the government for running a tax system to favour the richest, newly released documents reveal HM Revenue & Customs (HMRC) has cut 120 staff since 2016-17 from its “wealthy team” – a unit targeting wealthy individuals – from 1,007 in 2016-17 to 887 in 2021-22. MPs warned in January that the government was potentially missing out on “billions in lost revenue” by not properly resourcing its compliance teams.
James Murray, shadow financial secretary to the Treasury, said: “With taxes on working people at a record high, it is more important than ever that those with the broadest shoulders pay their fair share.
“We know this government has been turning a blind eye to ‘non-doms’ not paying their share of tax. Now we know that for years they have been stripping back the team that ensures wealthy taxpayers are paying what they should.”
An HMRC spokesperson said: “In 2021-22, our wealth unit brought in an estimated £2.5bn of tax which would have otherwise been unpaid. Their focus is helping people get their tax right first time and preventing non-compliance before it happens.
“Last year we recruited and trained 4,200 new compliance officers deployed across all tax risks. The National Audit Office has recognised that our compliance work provides good value to the taxpayer.”