Pensions Bulletin 2021/09 - Budget Special

Our viewpoint

This Budget Special summarises and comments on announcements made in the Speech and accompanying documents which are of potential relevance to pension schemes and their members.

Lifetime Allowance frozen until April 2026

The Lifetime Allowance – the maximum amount of pension savings that an individual can build up over their lifetime and still benefit from tax relief – will be frozen with immediate effect until at least 6 April 2026.

Several reductions have been made to the Lifetime Allowance over the years, and alongside the last reduction announced in 2015, legislation was put in place committing to annual increases in line with the Consumer Prices Index from 6 April 2018.  Today’s announcement removes that link.  It means that the roughly £6,000 rise that was expected on 6 April 2021 will not happen – the Lifetime Allowance will stay at £1,073,100.

Tax relief on benefits in excess of the Lifetime Allowance is recovered, when benefits start to be drawn (or when funds are put into drawdown arrangements) of value that takes the member over their remaining Lifetime Allowance, by the application of a tax charge, set at 25% if the excess is taken as a pension (on which income tax will then apply) or 55% (and no further tax) if taken as a lump sum.

The Government reports that this freezing is expected to raise extra taxes of £80m in the 2021/22 tax year rising to £300m by 2025/26.

With no actual reduction in absolute terms (as there was in 2012, 2014 and 2016), there will be no new protection regime.


The change is particularly relevant to those who have not started to draw any of their benefits (or who have funds already designated into a drawdown arrangement, where there is a Lifetime Allowance test at 75 too).  They may well be feeling that with the constant change in policy, financial planning is impossible.

The Budget papers note that “the lifetime allowance only affects those with the largest pension pots – 95% of savers approaching retirement are currently unaffected by it”.  But while the Lifetime Allowance has been a niche issue to date, it is no surprise that the impact figures show the measure having increasing effect over time (as funds grow; and even without adding on new savings, typically defined benefit pensions increase with salary links or inflation before retirement).

The Government also acknowledges that “Where individuals now breach the lifetime allowance, some may reduce their hours or retire earlier than they want to, to stay within the lifetime allowance”.  The British Medical Association certainly seems to think that this change could lead to unwelcome behavioural changes including some senior NHS staff choosing to retire after the Covid crisis is over.

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Charge cap costs to be examined again?

In an announcement that had not been publicly trailed the Government is to consult “within the next month” on whether certain costs within the DC default fund charge cap affect pension schemes’ ability to invest in a broader range of assets.  This is to ensure pension schemes are not discouraged from such investments and are able to offer the highest possible returns for savers.

The DWP will also come forward with draft regulations to make it easier for schemes to take up such opportunities within the charge cap by smoothing certain performance fees over a multi-year period.


The DWP completed its review of the charge cap in January (see Pensions Bulletin 2021/03), but this latest news seems to be related to the follow up from the 2019 consultation on proposals to encourage DC schemes to consider a wider range of investments (see Pensions Bulletin 2020/38).  Speculatively, there may be tension between the DWP’s desire to keep charges low for members and HMT’s desire to help kickstart the post-Covid economy by pension schemes investing in more varied investments such as illiquid infrastructure projects.  We will find out soon enough.

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Tax thresholds frozen from 2022 to 2026

One of the two main measures Chancellor Sunak announced to help balance the books after the Covid-19 giveaway is to freeze both the income tax personal allowance and higher rate threshold from April 2022 to April 2026.

Both figures will be increased by the CPI as planned in April 2021, taking the personal allowance to £12,570 and the higher rate threshold to £50,270.  The thresholds will then stay at those levels until April 2026.

Similarly, the Upper Earnings Limit/Upper Profits Limit national insurance contribution threshold is increased to £50,270 in April 2021 and will then be frozen at that level until April 2026.  The NICs Primary Threshold/Lower Profits Limit is increased to £9,568 from April 2021 but will then, along with other NICs thresholds, be considered and set at future fiscal events.

The inheritance tax nil-rate bands will remain at existing levels until April 2026, whilst the Capital Gains Tax Annual Exempt Amount is also being frozen at its current level until April 2026.


This policy is set to deliver additional revenue to the Exchequer of more than £20bn over the next five years and has clearly been preferred to raising the headline tax rates of any particular tax band.  Given pension contributions made by an individual usually receive tax relief at that individual’s marginal rate this may encourage additional contributions to be made by those earning amounts around the thresholds.

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Corporation tax rate rises – but with protections

By far the biggest mechanism by which the Chancellor hopes to fix the public finances is the increase in corporation tax, from the current rate of 19% to 25%, but only from April 2023.  The Treasury expects this will bring over £45 billion in tax revenue over the three-year period from 2023 to 2026.

However, this full rate will only be applied to businesses with profits over £250,000, affecting around 10% of companies.  A new “small profits rate” will be introduced for companies with profits of £50,000 or less, and is set at 19% – ie there will be no increase in rates for these companies.  A taper will apply for companies with profits between £50,000 and £250,000.


With an increase in tax rates (usually) comes an equal increase in tax relief from employer pension contributions.  Sponsors of DB schemes with large deficit contributions and a flexibility to agree new or revised recovery plans may benefit from a temporary delay in paying contributions to their pension schemes.

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Furlough extended until the end of September

Furlough, or to give it its proper name, the Coronavirus Job Retention Scheme (CJRS) has been further extended until the end of September 2021.  It had been due to run until the end of April (see Pensions Bulletin 2021/01).  Employees will continue to receive 80% of their current salary for hours not worked, subject to a monthly cap, with employers only required to pay national insurance and pension contributions in respect of these hours in April, May and June.

From July, the government will introduce an employer contribution towards the cost of unworked hours of 10% in July, 20% in August and 20% in September – in other words, the government contribution will fall first to 70% and then to 60% of salary for hours not worked.


This will surely be the last extension of the furlough scheme.  If it has to be extended again that implies very bad things about the pandemic coming to an end.

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Gilt issuance remains high over 2021/22

The Government is having to fund its response to Covid-19 by increasing borrowing, which is expected to lead to gilt sales of £295.9bn in 2021/22.  That’s considerably less than the gilt sales of £485.5bn in 2020/21, but still almost double the £156.1bn that was originally forecast for gilt sales in 2020/21 in last year’s Budget.

The gilt issuance by auction and syndication covers £267.9bn of that total, and is expected to be split as follows:

  • £87.0bn of short conventional gilts (29.4% of total issuance)
  • £65.4bn of medium conventional gilts (22.1% of total issuance)
  • £82.8bn of long conventional gilts (28.0% of total issuance)
  • £32.7bn of index-linked gilts (11.1% of total issuance)


The effect of Covid-19 means that there should be plenty of gilts to go around, with an extra c£450bn issued over the last couple of years to help pay for the pandemic.  Gilt yields have already increased significantly over the last month or so; if that trend continues the funding of less well hedged pension schemes could receive a timely boost.

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