Income tax saved on pensions up 27% in past year to reach £2.8bn

• People taking advantage of full pension allowance amidst fears it may be cut for high earners

The total amount of income tax saved by individuals investing in their personal pensions jumped 27% in the last year as to £2.8bn up from £2.2bn the previous year*, says Salisbury House Wealth, the leading financial adviser.

Salisbury House Wealth says that people are increasing payments into their pensions ahead of possible changes. Speculation has centred on pension tax relief for high earners, which many believe may be targeted for cuts.

Over the last decade, the Treasury has made significant cuts to both the lifetime and annual pension allowance in-order to increase tax receipts:

• The lifetime pension allowance has been reduced from £1,800,000 in 2011/12 to £1,072,100 in 2020/21
• The annual personal pension allowance decreased from £255,000 in 2010/11 to £50,000 in 2011/12 and to the current level of £40,000 in 2014/15, although for those earning £240,000 and above, every £2 earned above £240,000 causes the annual allowance to decrease by £1

It is feared that the cuts to pension allowances could continue as the Treasury looks to recoup some of the money it has issued to help businesses and individuals deal with financial impact of COVID-19.

The increase in the amount of money being put into personal pensions is also being driven by reductions in the personal allowance for individuals who earn over £100,000. The personal allowance has been reduced by £1 for every £2 an individual earns over £100,000. As a result, some high earners are now putting more into their pensions to bring their post pension contribution income back down to £100,000 and reduce their Income Tax liability.

Salisbury House Wealth says that people are increasingly investing more into their pensions to reduce their tax burden, due the gradual reduction in tax benefits granted to other investments, for example restrictions on EIS and VCT investments.

Tim Holmes, Managing Director of Salisbury House Wealth, says: “Pensions are the bedrock of retirement planning and savers should take full advantage of all the tax-free pensions allowances whilst they can.”

“The Chancellor is currently looking at ways to cover the enormous COVID-19 debt bill that is growing by the day and there is the concern that cutting the pension allowance could be one solution. The Government should act with caution, cuts to the allowance could lead to people not saving enough for their retirement, which would cause significant problems in the future.”

Notes to Editors
Salisbury House Wealth is a leading financial advisor founded in 1986, and based in Leicester.

Salisbury House Wealth offers specialist professional advice to high net worth and mass affluent individuals on a range of financial products. These include mortgage and pension plans, investment programmes, inheritance tax plans and life insurance.

Personal Pension Contribution Tax Repayments (£bn)

* Data from the Office for National Statistics (ONS)