Changes To Pensions – 2023 Budget
28th March, 2023
During the 2023 Spring Budget, the chancellor announced a number of significant changes to pensions. The most notable of these changes relate to the lifetime allowance and the annual allowance, however, there were also some additional changes which you may also be impacted by as highlighted below:
The lifetime allowance (LTA) which was capped at £1.073 million is to be abolished from 6 April 2024. Currently, when an individual has pension savings that exceed the LTA, they are liable to a tax charge of 55% of the excess over the limit if the benefit is taken as cash or 25% of the excess where the entire benefit is taken as a pension drawdown.
Whilst the LTA is being abolished from 6 April 2024, the LTA charge itself is being removed from 6 April 2024.
The annual allowance (AA) is to be increased from £40,000 to £60,000 from 6 April 2023. This is the maximum amount that an individual can pay into a pension each tax year on which they receive tax relief.
Any amounts paid into a pension over this limit are subject to an annual allowance charge at the taxpayer’s marginal rate of tax.
Any unused allowance can be carried forward for up to 3 years, provided the taxpayer was a member of a registered pension scheme during the relevant years.
Tapered Annual Allowance
Individuals who have ‘adjusted income’ over £240k are currently subject to a restriction of the annual allowance which is equal to a £1 reduction for every £2 over the £240,000 threshold.
This tapering reduces the annual allowance to a minimum of £4,000 i.e individuals with a total adjusted income of £312,000 or more will have an allowance of £4,000.
However, from 6 April 2023, the minimum allowance reduced by the tapering will increase from £4,000 to £10,000. This is alongside an increase in the threshold of ‘adjusted income’ from which the tapering applies from £240,000 to £260,000 i.e individuals with a total adjusted income of £320,000 or more will have an allowance of £10,000.
Pension Commencement (Or Lump Sum) Allowance
For some time, it has been possible to withdraw up to 25% from your pension savings tax free from age 55. However, this allowance will now be capped at £268,275 which is equal to 25% of the current LTA.
Money Purchase Annual Allowance (MPAA)
Finally, the MPAA has been increased from £4,000 to £10,000. This is the limit in the annual allowance for individuals who have already started drawing from their money purchase pension savings. This means that people returning to work, can now contribute more to their pensions without incurring additional tax charges.
If you need any advice or guidance regarding the above changes, or if you are looking to make pension contributions feel free to get in touch and we would be more than happy to assist!