The Treasury will net an extra £400m as a result of people paying tax on their retirement withdrawals, according to the Office for Budget Responsibility’s (OBR) fiscal outlook.
The document, which was published alongside the Budget, revealed a significant upgrade in the estimated pension freedoms tax take for 2018/19.
Based on the Spring Budget 2017 costings, which factored in a tax take of £900,000m in 2018/19, Monday’s figures suggested a near 50% increase in revenue raised from the pension freedoms this year to £1.3bn, taking the grand total generated in tax by the policy to £5.5bn.
AJ Bell senior analyst Tom Selby said: “The whopping £13bn cut in the OBR’s borrowing forecast for this year wasn’t the only windfall to land in the chancellor’s pocket yesterday. Buried in the OBR document is a revelation the Exchequer will net a cool £400m more than expected from the taxation of pension freedom payments in 2018/19.”
He continued: “The OBR says this is because ‘earlier cohorts are drawing down their pensions for longer’. This could be explained by the fact buoyant stockmarkets have allowed savers to take income from their pensions for longer than expected. Alternatively, the OBR’s initial guess may simply have been wrong.
“Either way, there is no doubt the policy has been hugely successful from the Treasury’s perspective, both in boosting the attractiveness of pensions and raising additional tax revenue.”
In Monday’s Budget, chancellor Philip Hammond revealed plans to increase the tax-free personal allowance to £12,500 and the higher rate tax threshold to £50,000 by 2020 – announced in May 2017 – will now come into effect next year.