Last month, UK Chancellor Jeremy Hunt delivered his first Budget in which he set out the Government’s revenue and spending plans to grow the economy. The Budget focused on getting workers “back to work”.
Some of the proposed changes announced to encourage people to return to work or to continue working for longer were around the allowances for tax free private pension savings, namely, the abolishment of the lifetime limit cap on the amount that can be saved in a pension and the increase in the annual pension allowance.
Pension lifetime allowance – key changes
Currently, a lifetime limit is placed on the total value of the private pension fund that can benefit from tax relief. This limit is called a lifetime allowance and is set at £1,073,100. Where pension funds have been built up and the capital value exceeds the lifetime allowance, a tax charge is levied on the excess (a lifetime allowance charge).
From April 2023, the lifetime allowance charge will be removed and from April 2024 the lifetime allowance will be abolished.
Pension annual allowance – key changes
The annual allowance is the amount by which tax relieved pension savings in a registered pension scheme are allowed to increase each year. In simple terms, the current allowance is £40,000 and it has been set at this level for almost a decade.
The standard amount of £40,000 is often reduced. This is, for instance, due to tapering for high income individuals. The annual allowance gradually decreases how much can be put into a pension (and still receive tax relief), starting at £40,000 and reduces to £4,000 (before a tax charge is faced). At the moment, this restriction applies to people with their adjusted income over £240,000.
From April 2023, the standard annual allowance increases to £60,000 with the minimum tapered annual allowance increasing from £4,000 to £10,000. The tapered allowance will start to apply when the adjusted income reaches a level of £260,000.
What the changes could mean?
Pension changes in the Spring Budget revolve around allowing individuals to pay more into their pension plans. Those who can afford to make the most of these new allowances are more likely to benefit from the changes.
Those who were concerned about exceeding their tax free contributions in relation to the lifetime allowance, may wish to reconsider their pension arrangements and think about restarting the contributions.
Those with a higher income may be able to contribute more into their pensions in a tax efficient manner from 2023/24. This may have a positive effect on the level of their personal allowance, if it was tapered in the past.
Pensions are a complex area of planning and tax treatment depends on individual circumstances, therefore we would advise seeking professional advice to ensure that the upcoming changes are used in a tax-efficient way.
If you have questions regarding pension allowances, please get in touch with a member of our tax team.