Chancellor Rishi Sunak’s fiscal policy could be pocketing the government a lot more than initially estimated, thanks to the ever-persistent inflation.

The Stealth of Fiscal Drag

Here’s a term to become familiar with – fiscal drag. In plain English, this means that when the government decides not to increase the amount where people start paying taxes, known as the income tax threshold, and wages increase due to inflation, more of your salary could be taxed.

Let’s break this down a bit:

1. Normally, if you earn up to £12,570 a year, you wouldn’t have to pay income tax. This figure usually increases as inflation rises so that you aren’t unfairly taxed on what’s considered a basic income.
2. However, Sunak decided this threshold would remain unchanged until 2028. If it had risen with predicted inflation, you would only start paying tax when you earn around £16,200 a year.
3. With more people’s salaries now falling above this unchanged threshold, the government will see more income from tax.

Adam Corlett from the Resolution Foundation points out that this method isn’t new. Various governments have used it to discreetly increase revenue. But what’s eyebrow-raising this time is the scale – a potential increase to £40 billion by 2028.

But Didn’t We Start With a Lower Estimate?

You’re absolutely right. When Sunak first announced this freeze back in 2021, the forecast was for it to net the Treasury an extra £8 billion a year by 2026. But the relentless creep of inflation, alongside a decision to extend this freeze, has changed these predictions.

By March this year, new estimates suggested this would bring in £29 billion a year from 2028 onwards. Now, with the Bank of England’s latest forecasts, the Resolution Foundation is predicting the policy could rake in a whopping £40 billion a year by 2027-28. That’s Britain’s most significant tax rise in over 50 years.

What Does This Mean for the UK’s Finances?

Higher tax revenues might sound like good news for the government’s purse strings, but there’s a catch. Higher inflation rates can also lead to increased borrowing costs for the government.

Ruth Gregory from Capital Economics notes that if these policies do bring in £40 billion a year by 2027-28, this could provide the chancellor with some extra financial cushioning. But rising costs could wipe out some of these gains.

The Treasury remains optimistic, highlighting its aim to reduce inflation and expressing its commitment to prudent financial management.

From mortgage holders to loan seekers, rising interest rates in the UK can stir up a sense of trepidation. Yet those with money tucked away in savings may find themselves in a position to cheer. Recent changes to the interest-rate landscape mean that those of us with money in the bank could be seeing greater returns on our investments. From August 2021 through to September 2023, rates have steadily climbed, peaking at a very appealing 5.75% per year. But along with higher returns, comes a new consideration: tax, and just how much of your increased income will find its way into the government’s coffers. Cumbria Crack’s financial expert looked at the implications.

The Tale of Rising Interest Rates: A Mixed Bag

In today’s highly-volatile financial climate, we find ourselves noticing the little shifts in the economy more than we used to. The UK’s interest rates have been inching up since August 2021, and while borrowers might have winced at this trend, savers are keen to welcome the increasing returns on their stashed cash.

Traditional saving accounts, such as fixed-term deposits and regular savings accounts, respond well to rate hikes. Through August 2021, the best one could hope for was a yearly return of 1.7 per cent on a five-year fixed-rate bond. Yet in September 2023, rates reached a far more enticing 5.75 per cent per year. The numbers are good news for savers, but the new bounty leads to a question about taxation.

Tax Requirements and Savings Allowances: The Nitty-Gritty

Imagine you had £55,000 in a five-year fixed rate bond. In August 2021, at 1.7 per cent, you’d earn £935 in interest. By September 2023, that same sum at 5.75 per cent would amount to £3,162.50 in interest. Your interest has grown, but so has the attention from HM Revenue and Customs (HMRC).

It’s crucial that you’re aware of how much interest you’re earning, and whether it bumps you up over the taxable limits set by the HMRC. The good news is that there are allowances in place that enable some savers to earn tax-free interest. The Personal Savings Allowance permits basic rate taxpayers to earn up to £1,000 interest without paying tax, and higher-rate taxpayers can make up to £500.

However, additional-rate taxpayers miss out on this allowance. In the scenario above, an additional-rate taxpayer would have owed no tax on the interest earned in August 2021. Yet, when September 2023 rolls around, they’d owe tax on £2,162.50 of their income.

The Unavoidable – Paying Your Due Tax

It’s a harsh reality that, as our interest earnings grow, so too might our tax obligations. Once you cross the threshold of the tax-free allowance, you’re obliged to complete a self-assessment tax return. These forms require you to detail your savings income, including interest from banks, building societies and other financial products.

The tax you owe will hinge on your overall income and tax banding. Basic rate taxpayers may find themselves hit with a 20% rate on their savings income, while higher and additional rate taxpayers could see rates of 40% to 45%.

Staying within legal bounds is essential. The line between tax avoidance (legally minimising your tax obligation) and tax evasion (illegal tax dodging) is the “thickness of a prison wall”, to quote former Chancellor Denis Healey.

Tax-Efficient Alternatives – A Glimpse at ISAs and Investment Funds

The good news is that there are completely legal routes to optimising your savings while minimising your tax payments. Individual Savings Accounts (ISAs) are a good place to start. These accounts let you save or invest up to £20,000 per tax year, with nary a penny paid on the interest earned.

ISAs come in many shapes and sizes, from Cash ISAs and Stocks and Shares ISAs to Innovative Finance ISAs. Each has its benefits, and choosing the right one could lead to a significant reduction in tax payments. Investment funds are another avenue worth exploring; here, allowances such as Capital Gains Tax can be used to chop down the tax bill.

Keep an Eye on Dividends: New Allowance Changes

Finally, it’s worth noting that changes have also been made to the dividend allowance. Pre-April 2018, individuals could pocket up to £5,000 in dividends without paying tax. This was cut to £2,000 from April 2018, and was further trimmed down to £1,000 for 2023/2024. Keeping up-to-date with these changes is essential, whether you currently invest in dividend-paying stocks, or plan to in the future.

So, while the rise in interest rates may boost the income from your savings, keep a close eye on your tax responsibilities. And perhaps most importantly, don’t run afoul of the taxman – the consequences might not be worth the risk! It’s always best to consult a tax professional or get in touch with HMRC

Farmers, if you’ve ever felt the pinch of the English Basic Payment Scheme (BPS) changes, there might be a silver lining on the horizon. Farmers Weekly has a guide to take you through how to potentially reduce your tax bill and help you get to grips with the ins and outs of capital gains tax (CGT).

A Quick Catch-Up: What’s Happened with BPS?

Recent estimates suggest that nearly half of those involved with the English BPS have either bought, inherited, or been gifted entitlements. But with changes and devaluations, the original worth of these entitlements might have vanished.

But here’s the good news: this lost value can help in bringing down the CGT you owe when selling land or other possessions. This can be of huge help to individual farmers, business partnerships, and even larger companies.

Understanding the Basics

What Exactly Can I Use This Loss For?

This kind of loss is termed a ‘negligible value claim’ in tax lingo. You can claim it in your yearly tax declaration. The options then are:

1. To use it against any capital gains you’ve made in that specific year on other possessions.
2. Or, you can keep it in your tax account, saving it to offset future capital gains.

How Do We Work Out This Loss?

It’s the combined total of:

• The cost of any entitlements you bought
• The worth of any entitlements you inherited or were given as a gift

Is There a Time Frame to Make This Claim?

Nope, no strict deadline. But if you wish to use the loss for a particular tax year, then it’s best to claim within two years of that year finishing. It’s wise to make your claim sooner rather than later. Waiting too long might mean missing out or simply forgetting about it.

How Much Could I Potentially Save?

The taxman will want 28% of capital gains from selling houses, and 20% from land or other property sales.

To paint a clearer picture: Let’s say you have a loss of £50,000 and gain £100,000 from selling your farmhouse. This could lead to a tax cut of a handsome £14,000. The exact savings, though, will depend on CGT rates when you make the claim.

Pitfalls to Watch Out For

Land Bought with Entitlements a While Ago

For those who bought land with entitlements some years back and didn’t separate the values, it’s not too late. You can look back, break down the purchase, and include the BPS entitlements cost in your loss figures.

Inheriting Land and Shares from Family

If you’ve inherited land or partnership shares after a family member passed away but didn’t evaluate the entitlements at that time, you’re not alone. Many skip this step due to the 100% inheritance tax relief on business assets. If no official evaluation was done, you can still break down the values between land and entitlements.

How Do Families Split the Losses?

This one can be tricky. The division should ideally be based on the family business agreement. If there’s no such agreement, or it doesn’t mention splitting capital losses, then it’s best to split them the same way as everyday business profits. Getting this right can be complicated; professional advice might be needed.

Final Thoughts from the Expert

Andrew Robinson, a top accountant specialising in agriculture, stresses the importance of making use of these potential savings. By not claiming, you could miss out on future unexpected gains, especially when considering the pressures many farming businesses are currently facing.

Key Takeaway

If you’ve got entitlements, either bought, inherited, or gifted, ensure you don’t let this chance to save on taxes slip through your fingers. Even if you don’t foresee any significant gains soon, it’s still worth making a claim on your 2023-24 tax return. Stay ahead, and make sure you’re not missing out on any potential financial boosts.

Furnished holiday lets — properties rented out for short-term holidays — are becoming a hot topic in the UK. Recently, the Scottish Government introduced a new, stricter licensing scheme, aimed at curbing unscrupulous owners and introducing fair regulations. Many owners, however, are voicing concerns, referring to these changes as business-threatening. But HeraldScotland points out that in the midst of these opposing views, a significant financial aspect arises: the potential tax benefits linked to holiday property letting.

Tax Benefits from Furnished Holiday Lets

Unlike the more standard long-term rental properties, the income and capital gains sourced from furnished holiday lets may qualify for valuable reliefs that are typically restricted to trading businesses. Of course, these advantageous conditions come with certain obligations as laid out by Her Majesty’s Revenue and Customs (HMRC).

Key Conditions to Obtain Tax Relief

Primarily, these conditions stipulate that the property in question must be located in the UK or the European Union. The operation of letting out the property must have commercial intentions, primarily for profit generation. In any given tax year, the property must be available for short-term holiday accommodation for at least 210 days, and for half of that time (105 days), it must be genuinely let out to holidaymakers.

Flexibility in the Conditions

While these conditions may initially seem demanding, HMRC offers a degree of flexibility. If due to unforeseen circumstances, the magic number of 105 letting days is not achieved, a grace period applies. This means that the tax relief benefits can still be obtained for up to two consecutive years, as long as you can prove your genuine intention to operate as a furnished holiday let. However, caution is advised — if this situation extends into a third year, the property will subsequently lose its tax relief status.

Available Reliefs and Advantages

Assuming all conditions are fulfilled, various reliefs can come into play. For starts, interest paid on any borrowing directly linked to the property can be used to reduce taxable profits. In an era of rising borrowing rates, this could result in substantial income tax savings of up to 47% (the highest band of Scottish income tax). Also, any losses sustained from the holiday property letting can be offset against future profits.

Other advantages include the potential to increase the amount of tax-efficient pension contributions you can make each tax year, due to the rental business profits.

Postponing Capital Gains

Another strategic benefit is the option of deferring capital gains associated with holiday letting. If the property is sold off at a profit, the due capital gains tax (CGT) can be postponed by reinvesting the gains in other qualifying business assets up until they are sold. Moreover, if the holiday property is gifted, any capital gain arising can be postponed until the property is resold. There is even potential to tap into Business Asset Disposal Relief, which can lower the rate of CGT to only 10%.

Conclusion

The world of furnished holiday lets is ripe with financial incentives if navigated correctly. While more factors are at play, a knowledgable tax advisor can steer you through the intricacies, making the furnished holiday let a potentially attractive commercial venture in an ever-shifting property landscape.

Last financial year was a momentous one for UK’s top football clubs, but not for reasons that fans might expect. In an unprecedented move orchestrated by Her Majesty’s Revenue and Customs (HMRC), Premier League clubs were compelled to pay back a colossal £124.8 million in unpaid tax. To put it in perspective, this figure is more than twice the £58.7 million recouped the year before, per statistics gathered by UHY Hacker Young, a well-established accountancy group and reported in the Daily Mail.

An In-depth Look at the HMRC Tax Recovery

In order to fully understand the magnitude of this HMRC operation, we should first shed light on what made up this hard-to-grasp tax figure. Disclosed by the watchdog were three principal components – National Insurance deriving from both agents’ fees and image rights, tax on benefits in kind, and arrangements made for the benefit of players and their families by their respective clubs. The latter typically encompasses amenities such as flights and hotels.

Until recently, it was theorised that, through the method of dual representation contracts when settling payments with agents, Premier League teams had managed to bypass paying upwards of £250 million in dues.

Deciphering Dual Representation: Unfair Play?

An in-depth understanding of the so-called ‘dual representation’ reveals why it could potentially be exploitative from a tax standpoint. As per insights from Tax Policy Associates, using this approach, clubs and agents together can dodge employment taxes and the dreaded Value Added Tax (VAT). This is especially relevant considering the hefty commissions that agents garner through transfers and contracts.

Under this arrangement, agents are compensated for efforts made on behalf of both the club and the player within the context of a deal, instead of just receiving payment for representing their player. Consequently, agent fees, normally subject to income tax, national insurance and VAT, slip through the net when the amount is paid by the club.

Tax Analysts Weigh In: What’s Next for Football?

In response to the HMRC’s tax clawback announcement, expert Elliott Buss from UHY Hacker Young voiced his take on the unfolding situation. He said, “HMRC now have these clubs’ tax affairs in their sights.” Buss further intimated that an increasing portion of agents’ fees paid by clubs has sparked the taxman’s interest. Presumably, this indicates irregularities in tax payments related to these transactions.

HMRC’s Commitment to Fair Play

Meanwhile, HMRC has remained staunch in its mission to uproot tax misdemeanours within the football industry. In a released statement, the revenue body delivered a clear message, stating, “We will continue to carefully scrutinise arrangements between clubs, players and agents to ensure the correct tax is paid.”

“Our strategy,” HMRC continued, “entails working closely with the football industry to educate and address tax risks directly.” With this in mind, it seems pertinent to consider that the current path of the football industry might be due for a rerouting, as the future promises further vigilance concerning its tax dealings.

In the corridors of political power, the debate over tax cuts is one that refuses to quieten. UK Chancellor, Jeremy Hunt, has added to the fray, pushing back against the pressure for immediate tax reductions, Reuters reports.

No Quick Fixes Promised

Hunt made these statements at the Conservative Party’s annual conference held in the bustling city of Manchester. Amid calls for tax cuts from senior party members, he stood firm against promising speedy, “inflationary” tax cuts before the next election. Speaking to Times Radio, Hunt maintained that while he supported the idea of reducing taxes, he was unsure of the feasibility of achieving this before the next elections.

This message of caution was not what some in the party hoped for. Influential figures, including former Prime Minister Rishi Sunak, had proposed tax cuts as a way of closing the gap with the opposition Labour Party in the polls. The next election, believed to occur next year, looms large in everyone’s mind.

Hunt stressed any tax cuts this year would complicate Sunak’s January pledge of halving inflation by the end of the year. He said, “Do we want to move to lower taxes as soon as we can? Yes, but it means difficult decisions and we’re prepared to take those difficult decisions.”

Showing the Bright Side

Despite the weighty tax cut debate stealing the headlines, Hunt did bring some positive news. He announced a proposed increase in the minimum wage for workers over 23, up from 10.42 pounds to at least 11 pounds per hour.

Furthermore, he indicated a readiness to revisit the welfare system to ensure fair treatment for all taxpayers. He plans to revise the benefit sanctions regime, making it tougher for individuals to claim welfare payments without seeking employment actively.

Echoes of Division Among Conservatives

Divisions within the Conservative Party were noticeable on several fronts during the conference. Hunt’s position concerning tax cuts represents one aspect of these varying views, while the issue of illegal immigration evoked yet another set of conflicts among party members.

Sunak is aiming to rejuvenate his year-old premiership amidst these challenging times by demonstrating his resolve for making tough choices for the common good. However, as Hunt’s words foreshadowed, these will not be easy decisions, and they will not always please everyone within the party.

Rising Taxes and Fading Fiscal Discipline?

Sunak’s position has been affected by an Institute for Fiscal Studies report that surfaced recently. The report showed that tax revenue was set to comprise 37% of annual economic output by the next election – a record since the 1950s.

Liz Truss, who served as Prime Minister for a tumultuous six weeks last year, stressed the need for the Conservative Party to return to its roots as a paragon of fiscal responsibility.

Truss advocated that the party become “the party of business again” by reducing taxes and cutting red tape. She suggested the reestablishment of Corporation Tax at 19% ahead of this year’s Autumn Statement.

However, Hunt’s response to Truss was candid, reiterating his stance on the need for tougher decisions, not shortcuts. His focus remains on making it easier for companies to grow and pushing for spending efficiencies, including reforms to the welfare system.

In conclusion, it appears the tax cuts debate will continue for the foreseeable future; a tempest within the Conservative Party that eyes both fiscal responsibility and electoral gains.

Many British pensioners living overseas may be in for a shock. They followed Government advice, believing they could take a quarter of their pension pot tax-free at age 55. However, this might not be the case if they’re outside the UK, the Daily Mail reports.

The Guidance in Question

The Department for Work and Pensions-sponsored Money Helper-Pension Wise guide led many to believe they could take this tax-free lump sum. In the UK, taking 25% of your pension pot tax-free is quite common, and a favourite among retirees. But this doesn’t apply everywhere.

Countries like Australia, France, and Spain might not recognize this tax-free rule. As a result, Brits in these countries could end up paying almost half of this money in taxes!

Did They Know?

Financial experts are raising alarms, saying the guide missed important details. Instead of clearly warning Brits living or planning to live abroad, the guide kept stating that people over 55 could “usually” take out 25% tax-free. The guide seemed targeted towards those with ‘defined contribution schemes’—where you and your employer contribute, and you can access from 55. But it missed warning those looking to access their pensions outside the UK.

Real People, Real Problems

Robert Dart, who now lives in Australia, almost lost over £8,000 because of this misleading guidance. After being directed to Pension Wise for advice, he was about to withdraw £25,000 from his UK pension. He believed, based on their advice, it would be tax-free. Luckily, a financial adviser stepped in just in time, warning him of the tax he’d face from the Australian government.

“It was a real shock,” Mr Dart said, adding that he’s worried for others who might not have the same warning he did.

Experts Weigh In

Geraint Davies, from financial advice group Montfort, expressed disbelief. “This is supposed to be a guide for those who don’t understand pensions, but it ended up misleading many,” he said. Many have trusted this government-backed guide, and some might have already faced the repercussions, with more possibly yet to realize the implications. It’s like “a ticking time-bomb,” Davies added.

Jeff Bowman, an international tax consultant, chimed in, “What people dislike more than a tax bill, is an unexpected tax bill.”

Official Response

A spokesman from the Money & Pensions Service, which oversees Pension Wise and Money Helper, responded, saying their aim was to provide guidance. But they also emphasised the need for people to consider other resources and get regulated financial advice. They pointed out that the guide encourages readers to consult Money Helper, which includes details on retiring abroad.

Takeaway for Brits Abroad

If you’re a British pensioner living abroad or planning to move, it’s crucial to understand your tax obligations before withdrawing from your UK pension pot. It’s always best to seek expert financial advice, especially when navigating complex international tax rules. Don’t solely rely on general guidance, even if it’s government-backed.

Homebuyers in Scotland are grappling with soaring property taxes as the Scottish government raked in a record amount from Land and Buildings Transaction Tax (LBTT) per sale this August. This comes amid a climate where owning a home seems more like a financial burden rather than a milestone.

Sky-high Taxes in August

The month of August 2023 saw the Land and Buildings Transaction Tax (LBTT) revenues hitting a new record per transaction in Scotland. According to a study by a major property firm, DJ Alexander, the government collected a whopping £64.1 million from just 8,950 sales during this period. This meant that, on average, each transaction was taxed £7,162, marking the highest ever recorded average tax per sale.

A Closer Look at the Figures

While August saw a record average, the total revenue collected was the third highest ever, with the leading months in this taxation bonanza being since July 2022. The all-time high month was October 2022 when the Scottish government filled its coffers with £65.8 million from 10,050 sales.

David Alexander, the CEO of DJ Alexander, highlighted how the LBTT continues to be a significant source of revenue for the Scottish government, particularly taxing second homeowners and property investors heavily. However, he shed light on a worrying trend where a scant 1,600 buyers contributed to 83.4% of the total tax collected, indicating a dwindling pool of contributors.

The Crux of the Matter

The detailed analysis unveiled that most of the revenue was harvested from a small number of high-value sales. An additional dwelling supplement (ADS), a 6% surcharge on top of LBTT for second homes and investment properties, further boosted the revenue. Of the £42.9 million collected from sales without ADS in August 2023, a hefty sum of £35.8 million came from just 1,600 sales. These transactions were taxed an average of £22,375 in LBTT, representing 83.4% of the revenue from just 17.9% of the sales.

Moreover, ADS itself brought in £21.2 million, making up 33.1% of the total revenue in August 2023.

Concerns Over Rising Home Ownership Costs

The focus on tax revenue through home sales is raising eyebrows and concerns among citizens and experts. Mr. Alexander criticised the approach of targeting homeowners with higher taxes throughout their lives, mentioning the proposal of a Scottish version of inheritance tax and escalating council tax charges for band E properties.

He emphasized that these higher taxes, often painted as targeting the wealthy, are indeed affecting ordinary working individuals who find buying a home increasingly taxing, literally. Many homes valued over £325,001 are owned by regular working citizens, not just millionaires or the proverbially ‘greedy bankers’.

Mr. Alexander’s overarching message was clear: homeownership is becoming a cash cow for governments, and this taxation approach is hardly a method to make Scotland an inviting place to live, work, and invest.

According to the Institute for Fiscal Studies (IFS), a respected economic research group, UK families are bracing for a tax increase that averages £3,500 annually by the time of the next election. This is slated to be the most significant tax rise during a government’s tenure in more than 70 years.

Understanding the Numbers

To put it simply:

• In 2019, the taxes collected by the government made up about 33% of the nation’s total income.
• By 2024, this is expected to grow to roughly 37%.
• This growth translates to the government collecting an extra £100bn every year. For each household, it’s like paying an additional £3,500 in taxes, although the exact amount will differ for everyone.

Why the Increase?

You might be wondering, “Why such a rise?” The IFS points out several decisions made recently, like:

• Bumping up the main corporation tax rate from 19% to 25%.
• Introducing an energy profits tax.
• Pausing the usual increases of some income tax and national insurance thresholds, so more people are getting caught in higher tax brackets.

The Political Drama

All these numbers and changes are causing a bit of a storm in political circles:

• Chancellor Rishi Sunak, who made many of the tax decisions, is heading to the Tory party’s annual conference. He might face tough questions, especially as some party members are hoping for pre-election tax cuts.
• But, with the government’s budget announcement just around the corner, big tax cuts seem unlikely without reducing public services.
• Interestingly, before the last election in 2019, the Conservatives had warned that Labour would increase taxes. Now, under Keir Starmer, Labour is using these tax hikes to question the Tories’ ability to boost the economy.

The Wider Picture

The IFS isn’t the only group shining a light on financial inequalities. Another study, from the Resolution Foundation and innovation charity Nesta, reveals the wealth of the UK’s top 10% has grown a whopping 25 times faster than that of the poorest 30% from 2006 to 2020.

What Others Are Saying

Sarah Olney, representing the Liberal Democrats, didn’t mince words. She blamed the Tories for the economic situation and pointed out they once promised not to raise taxes.

However, a spokesperson for the Treasury responded, emphasizing that the UK still has a lower tax to income ratio than many European nations. They also highlighted the importance of reducing inflation and mentioned the challenges faced after the Covid pandemic and Russia’s actions in Ukraine.

Final Thoughts

The bottom line from the IFS? Despite any potential tax cuts, this period will go down in history as one of significant tax increases. These hikes aren’t just because of the pandemic but are a result of choices to boost government spending, especially for healthcare and reversing some austerity measures.

This likely indicates a long-term shift towards the UK becoming a higher-tax economy.

The world of pensions can seem pretty complicated. But with new tax changes afoot, it’s essential to know how you can make the most of your retirement pot. Interactive Investor covered the latest figures to help you understand what it all means for the average UK worker.

Understanding the New Pension Landscape

Growing Concerns on Pension Charges: HM Revenue and Customs (HMRC) has dropped some fresh stats about private pensions for 2023. Here’s the headline: more people are getting whacked with tax charges for going over their pension savings limits. Not ideal.

The Silver Lining: But before we start panicking, there’s some good news. From April 2023, some of these allowances have been bumped up. So, if you’re smart about your savings and you know your limits, you can avoid a nasty surprise from the taxman.

Breaking Down the Annual Allowance (AA)

The AA is basically a cap on how much you can save into your pension each year and still get tax benefits. Right now, you can save either everything you earn in a year or £60,000, whichever is lower. This is a big jump from the old £40,000 limit we had until April 2023.

For example, if you earn £50,000 a year, you can put that full amount into your pension pot. But if you’re on £70,000, you’ll be capped at £60,000.

What if you go over the limit? Any extra gets taxed, and you’ll lose out on some valuable tax breaks. Though, if you’re retired and you’ve cashed out your pension due to severe illness, you’re off the hook.

The Numbers: In the 2021-22 tax year, charges for breaking the AA limit hit £335 million, a 50% spike from the previous year. The hope is that the new, more generous allowances will help cut down these figures in the future.

A Closer Look for High Earners

If you’re earning more than £260,000 a year, your AA might shrink to as low as £10,000 due to what’s called the “tapered annual allowance”. Essentially, the more you earn over that £260,000 mark, the less you can save tax-free in your pension. The smallest this allowance gets is £10,000 if you’re earning £360,000 or more.

But there’s some relief. Previously, the lowest it could go was £4,000. So, high earners have a bit more wiggle room now.

Retirees, Watch Out

For those who have started taking money from their pensions, there’s another cap called the “money purchase annual allowance” (MPAA). This determines how much retirees who return to work can put back into their pensions. As of April, this allowance went up from £4,000 to £10,000.

Carrying Forward: The Bonus Round

There’s a cool trick where you might be able to save more than the annual £60,000 limit. It’s called the “carry forward” rule. If you’ve not maxed out your pension savings in the last three years, you could add those leftover allowances to this year’s savings. This might mean stashing away up to £180,000 in a year!

The Lifetime Allowance Saga

The “Lifetime Allowance” (LTA) was an upper limit on how much you could save in your pension across your life. Anyone who exceeded it faced some chunky tax charges. But, big news – the LTA will be scrapped by April 2024. However, you’ll now have a cap on how much you can take out tax-free, set at £268,275.

This is fantastic for those who haven’t taken money out of their pensions yet. Now, you can save and grow your money without worrying about future big tax hits.

Parting Thoughts

For many, staying inside these pension allowances isn’t too hard. Not everyone can or wants to save £60,000 a year. But if you’re close to these limits, keep an eye on your numbers, especially anything your employer might be adding.