Pension tax charges could greet more Britons as frozen threshold limits retirement savings

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Britons saving for retirement should be careful not to breach their Lifetime Allowance (LTA). Exceeding the threshold could mean being hit with tax charges on their retirement savings.

The Lifetime Allowance places a cap on the tax-free savings Britons can build up for retirement throughout their life.

It is currently set at £1,073,100.

People who breach the LTA could be hit with tax charges of up to 55 percent on their excess savings.

Pensions are generally tested for the allowance when someone draws from their fund, reaches age 75, or upon death.

The pensions assessed by the LTA are:

  • Defined benefit (final salary or career average) schemes
  • Savings in defined contribution pensions.

The state pension is not included in the assessment.

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Lifetime Allowance freeze

The 2022/23 tax year has just begun, but no change has been made to the LTA.

This will continue to be the case for several years, as the threshold will be frozen until at least 2026.

Over time, the effects of inflation could therefore mean more Britons fall foul of the allowance.

The LTA has already been reduced significantly over the years, previously standing at a significantly higher level.

When it was first introduced in 2006, the LTA was set at £1.5million.

Further increases to the limit were then made to make it more generous, eventually taking it to £1.8million.

However, it was then slowly tapered down, reaching a low point of £1million in 2016/17.

Some smaller increases have since been made to the LTA, but it is still considerably lower than it once was.

Lifetime Allowance historical rates:

  • 2022/2023 – £1,073,100
  • 2021/2022 – £1,073,100
  • 2020/2021 – £1,073,100
  • 2019/2020 – £1,055,000
  • 2018/2019 – £1,030,000
  • 2017/2018 – £1,000,000
  • 2016/2017 – £1,000,000
  • 2015/2016 – £1,250,000
  • 2014/2015 – £1,250,000
  • 2013/2014 – £1,500,000
  • 2012/2013 – £1,500,000
  • 2011/2012 – £1,800,000
  • 2010/2011 – £1,800,000
  • 2009/2010 – £1,750,000
  • 2008/2009 – £1,650,000
  • 2007/2008 – £1,600,000
  • 2006/2007 – £1,500,000.

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