In the run-up to a budget there is always speculation around tax relief on contributions, tax-free cash from pension pots and the age you can access your pension. In this budget, it came as a big surprise that none of this really featured but instead there were changes for those wanting to save for retirement.
Lifetime Allowance (LTA) abolished
Whilst pre-budget news reports rumoured that the Chancellor was expected to raise the pension Lifetime Allowance (LTA) up to £1.8m, and which would have brought it closer to its previous peak in 2011/2012, he instead chose to announce its abolishment.
Prior to this week’s conjecture, and today’s subsequent announcement, the LTA, which governs how much can be saved in a pension before tax charges apply, was expected to remain at its current level of £1.073m until 2025/26. This effectively sets the maximum tax-efficient value of all your retirement benefits, assuming you have not already applied for any of the protections that are available. If your accumulated pension benefits exceed the LTA there is a tax charge of 25% if the excess is drawn as taxable income, and 55% if it is received as a lump sum. Following today’s budget, from April 2023, this will no longer apply.
For those in the accumulation stage the following three changes will make for positive reading as they all signify a step away from ‘fiscal drag’ and offer encouragement to those wishing to build a pension pot.
Annual Allowance increased
Millions of people save into a pension and in doing so they benefit from paying no Income or Capital Gains taxes on the money as it grows. To provide an incentive to save for retirement the Government provides 20% tax relief on personal contributions, but higher and additional rate taxpayers benefit the most as they can obtain additional tax relief at their higher rates, not just at the basic rate.
From April the annual allowance will rise from £40,000 to £60,000 which can be contributed into a money purchase pension scheme/personal pension/SIPP.
Individuals will continue to be able to carry forward unused Annual Allowances from the 3 previous tax years but this needs careful planning as there are rules around this which must be adhered to.
This could be welcome news to senior NHS workers who have been hit by annual tax charges for exceeding the current annual allowance calculation in their defined benefit (DB) NHS scheme.
Money Purchase Annual Allowance (MPAA) increased
Also announced today, and again part of the measures to encourage early retirees back into the workforce, and/or to support those looking to supplement their pension income, is an increase in the Money Purchase Annual Allowance – a restriction on your pension contributions which are eligible for tax relief if you have already started drawing down flexibly from your defined contribution pension scheme. This will increase from the current tax-free threshold of £4,000 to £10,000 from April 2023, allowing additional tax-free pension savings for those retirees returning to the workplace.
Tapered annual allowance
The tapered annual allowance further limits the amount of tax relief high earners can claim on their pension savings by reducing their annual allowance to as low as £4,000 currently. This limit has increased to £10,000, and the adjusted income threshold for the Tapered Annual Allowance will also be increased from £240,000 to £260,000 earnings.
Watch our Spring Budget Analysis Webinar to hear what experts from our tax, financial services and accounting teams thought about the changes announced and how they could impact you and your business.
