The UK’s top economics research organization has called Jeremy Hunt’s budget decision to eliminate the cap on pension savings “bizarre” and stated that it creates an extra inheritance tax loophole for wealthy earners that should be closed as soon as feasible, Entrepreneurng report.
According to the Institute for Fiscal Studies (IFS), many high-income individuals will now be able to increase their pension pots to leave hundreds of thousands of pounds more to their loved ones tax-free upon death as a result of last week’s budget. According to the IFS, pension savings should be used to finance retirement incomes rather than as a tax haven.
Hunt eliminated the pension lifetime allowance, or the cap on how much money pensioners may save in their pots throughout their lifetimes, in the budget. Before this change, there was a tax levy of up to 55% on everything over £1.07 million.
The cap, which applied to all employment and personal pensions but not the state pension, was scheduled to remain at the same amount until 2026. As was anticipated, the chancellor did not raise the allowance but instead eliminated it.
Also, he raised the annual limit from £40,000 to £60,000, which is the maximum amount that can be saved in a pension pot in a single tax year without subjecting the saver to taxation.
The Treasury claims that it took action because a staffing shortage was caused by many professionals, including GPs and NHS consultants, retiring early as soon as they reached the lifetime allowance’s maximum.
According to official budget records, the Treasury will lose a total of £2.75 billion over five years if the lifetime allowance is eliminated. The entire policy of exempting pension savings from inheritance tax, according to research economist Isaac Delestre of the IFS, should be changed by the government, he added.
Whatever your opinion of inheritance tax may be, the fact that the tax code favors pensions as an inheritance vehicle over a source of retirement income is peculiar, he added.
However, removing the lifetime allowance has certain benefits, but it will also enable the tax-free transfer of greater pension assets after death. In a scenario where just £1.07 million of their wealth is in a pension, a wealthy person dying with £2 million in their pension which is not improbable under the new regulations might cut their inheritance tax payment by as much as £370,000.
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, according to newly released documents. This comes after Labour criticized the government for running a tax system to favor the richest. In January, lawmakers warned that the government could be losing out on “billions in lost revenue.” by inadequate staffing of its compliance teams.
“With taxes on working people at a record high, it is more crucial than ever that those with the broadest shoulders pay their fair part,” said James Murray, the Treasury’s shadow financial secretary.”
“We are aware that this government has been ignoring the fact that ‘non-doms’ are not paying their fair share of taxes. Now that we know, they have been reducing the crew that makes sure rich taxpayers are making the proper payments for years.”
According to an HMRC representative, the wealth unit collected an estimated £2.5 billion in taxes that would not have been paid in 2021–2022. Their main goals are to assist clients in filing taxes correctly the first time and to stop non-compliance before it starts.
In conclusion, it was seen that 4,200 new compliance officers were hired and educated last year, who were deployed across all tax risks. The National Audit Office has acknowledged that the taxpayer receives good value from our compliance efforts.