Posted 16th March 2023
Following the Chancellors announcements in the Budget yesterday, a number of changes to the pension regime has made saving tax efficiently into pensions now more advantageous and generous:
Lifetime Allowance (LTA) abolished
The LTA will be abolished from April 2024, but withdrawals in excess of the LTA next year will not suffer a charge – effectively the LTA rate will be set to 0%. This is to allow for the unravelling of the existing legislation with changes to be included in a subsequent Finance Bill.
This essentially removes the cap on lifetime savings, creating an opportunity for further funding, even if the LTA had previously been fully used.
There will, however, be a cap on tax free cash at 25% of savings subject to a maximum of £268,275 (25% of the current LTA).
While the various forms of LTA protection will be redundant with regard to the LTA charge, they may still be relevant when determining tax free cash. Subject to certain conditions, anyone with a tax free cash entitlement in excess of £268,275 because of their LTA protection will retain these rights to this higher amount. They will also be able to restart pension funding from 6 April 2023, without losing any existing protection. Those with scheme specific tax free cash in excess of 25%, or with stand-alone lump sum rights, will also keep this entitlement.
Annual Allowance changes
Tax relief – An increase of £20,000 to £60,000 in the annual allowance presents an opportunity to make a large contribution, with extra tax relief of up to £9,000 from April for additional rate taxpayers. This maybe attractive for those who will be paying additional rate tax on their income for the first time once the additional rate threshold reduces from £150,000 to £125,140 in 2023/24.
Tapered annual allowance – The minimum tapered annual allowance will increase from £4,000 to £10,000 from April. This is accompanied by a rise in the adjusted income threshold to £260,000, however the threshold income figure is to remain at £200,000. This will take more people out of the reaches of tapering and those who do exceed will still be able to contribute more.
Money Purchase Annual Allowance – The increase in the MPAA from £4,000 to £10,000 will mean that those who have already started to draw income from their pensions will be able to contribute more, this may encourage more people to return to the workplace.
Personal income tax allowance – Personal allowance will be reinstated if adjusted net income falls below the £100,000 income limit. This means that a full personal allowance would be within the reach of a person with income of £160,000 by utilising the full £60,000 annual allowance. A contribution in excess of this could be available by carrying forward any unused allowances from pervious tax years.
If you would like to discuss any of the above with us please do get in touch.