On 6th April, the government introduced several changes to pension allowances that individuals are entitled to before tax. These came as part of the government’s plans to ‘get Britain back to work’, which included incentivising a longer work life, particularly for high-skilled older workers such as NHS doctors.
When such changes are introduced, they can often be hard to digest – especially when so many are announced at once as with the Spring Budget back in March. With this in mind, we thought that we would use this week’s Tax Tuesday to break down the changes to pension allowances going forward.
Annual Allowances
Your Annual Allowance is how much you’re allowed to save tax-free each year. From 6th April 2023, this increased to £60,000 per year (previously £40,000). For some people, who earn income above a certain threshold, a Tapered Annual Allowance will be applied. If you are subject to the Tapered Annual Allowance, then the amount of money that you can save tax-free each year will decrease by £1 for every £2 you earn that exceeds the threshold (£260,000).
You are able to access the money you have saved up towards your pension flexibly. However, if you do so, it will trigger the Money Purchase Annual Allowance (MPAA), which is a reduction of the standard annual allowance. Previously the MPAA was £4,000, but from 6th April 2023 it was increased to £10,000.
The following actions may trigger the MPAA:
- taking cash or a short-term annuity from a flexi-access drawdown fund
- taking cash from a pension pot (‘uncrystallised funds pension lump sums’)
Lifetime Allowance
One of the main reasons some people may choose to retire could be if they’ve reached the Lifetime Allowance. This was the limit on the tax relievable pension savings that an individual can benefit from throughout their lifetime. The Lifetime Allowance was previously £1,073,100 but from the 6th it was removed, meaning that there are now no limitations to the tax-free pension savings an individual can make in their lifetime (aside from the Annual Allowance each year of course).
Several other changes have been made to the various lump sums available, in light of removing the Lifetime Allowance. When you begin to receive your pension benefits, you may be entitled to a tax-free lump sum, called the Pension Commencement Lump Sum. Previously, the maximum amount that most individuals could claim was 25% of their available lifetime allowance at the time of receiving the sum. As the Lifetime Allowance has now ended, an upper monetary cap has been put in place at £268,275, which is 25% of the previous Lifetime Allowance.
There have also been changes to the taxation of the Lifetime Allowance excess lump sum, serious ill-health lump sum, and defined benefits lump sum death benefit, which will now be taxed at a marginal rate on an individual level, rather than the previous 55% tax charge above the Lifetime Allowance.
How can we help?
If you have questions relating to the updated pension allowances, then please do not hesitate to get in touch with our tax team on tax@haroldsharp.co.uk or call 0161 905 1616