The little-known tax rule taking £30,000 out of landlords’ pensions
Landlords are missing out on thousands of pounds in pension income thanks to a little-known tax rule over two decades old.
Buy-to-let investors can only save £3,600 of their rental income into their pension each year tax-free, thanks to a limit introduced in 2001. If this cap had risen in line with inflation, it would be worth more than £6,000 today – almost twice as much.
The cap for landlords has been in place for years, but recent pension reforms have made the limit appear even more restrictive in the latest blow to property investors.
Most other savers will be able to invest up to £60,000 of their income into their pension each year, thanks to recent pension reforms announced in the March Budget.
The “annual allowance”, which caps how much anyone can save into their pension tax-free, is currently set at £40,000, but will increase by 50pc in the new tax year as part of a wider package of reforms designed to tempt early retirees back into the workforce.
But despite big increases in savings limits for large parts of the population, buy-to-let property investors are still excluded.
If a landlord had invested their maximum rental income allowance into their pension since 2001, then they would have £125,537, according to calculations from the wealth manager Quilter. However, had this cap grown in line with inflation, then their money would have grown to £155,409 – a difference of more than £30,000.
Jon Greer, of the firm, said that buy-to-let investors had been left behind by Chancellor Jeremy Hunt’s pension reforms.
“This £3,600 limit has not been reviewed in over 20 years,” he said. “And there is no clear reason why. Moving to a new structure might help. If you have a rental business that is set up as a company, for example, then one way directors can be remunerated is through their pensions.
“This can then be counted as a cost of labour by the company, and you can circumvent the £3,600 limit. However, setting up a company will not be advantageous to everyone, as it will have individual tax implications.”
The frozen cap represents yet another squeeze on buy-to-let investors, who are already paying more tax on rental income. Before 2017, landlords could deduct all of their mortgage interest from their rental income when calculating their tax liability.
However, this relief was phased out from 2017 to 2020. Now, they only get a 20pc tax credit. Landlords also face a ban on no fault evictions, which will make it harder to sell their homes, as well as other incoming reforms aimed at boosting renter rights.
Higher borrowing costs have also squeezed investors in the sector, with a typical landlord losing £100 in profits a month as higher mortgage squeeze yields, according to research from analysts Capital Economics.
Not all investors are affected by the £3,600 cap, as income earned from furnished holiday lets qualify as “relevant earnings” and can be invested up to an individual’s annual allowance.
The Treasury was approached for comment.
