Pension tax limits are being raised to support the Government's efforts to encourage inactive individuals to return to work.
The Chancellor is particularly targeting those aged 50 and above, and the changes remove incentives to reduce hours or leave the labour market.
Legislation will be introduced in Spring Finance Bill 2023 and will have effect from 6th April, 2023. This will:
- Increase the Annual Allowance from £40,000 to £60,000.
- Increase the Money Purchase Annual Allowance from £4,000 to £10,000.
- Increase the income level for the tapered Annual Allowance from £240,000 to £260,000.
- Ensure that nobody will face a Lifetime Allowance charge.
- Limit the maximum an individual can claim as a Pension Commencement Lump Sum to 25% of the current Lifetime Allowance (£268,275), except where previous protections apply.
Legislation will be introduced in a future Finance Bill to remove the Lifetime Allowance from pensions tax legislation.
Andrew Clayton, partner at RNS Independent Financial Advisers, described the pension changes as significant.
“A number of clients will benefit from the changes,” he said. “It is more tax efficient for a business to invest in pensions than pay the higher levels of corporation tax on profit.
“Evidence suggests that self-reported retirement has been the main driver for those aged 50 to 64 to leave the labour market.
“The measures will support an individual's ability to build up retirement savings and so improves the financial incentive of work.”
Pensions annual allowance
Currently, the most you can normally save into private pension pots in one tax year before you start paying tax is £40,000.
This is known as the 'pensions annual allowance'. The Government has confirmed that this allowance will rise by £20,000 to £60,000 from 6th April.
You can only receive tax relief on up to 100% of your earnings below the annual threshold.
This may include earnings from your wages, taxable benefits or royalties. If you earn £30,000 a year, that's how much you can pay into your pension each year while still receiving tax relief.
If you're a very high earner, the annual allowance reduces, or 'tapers', though the amount you can earn before the taper applies is being increased, from £240,000 to £260,000.
You'll now get tax relief on your pension even if you already have a large pot
There is currently a limit on how much you can build up in pension benefits over your lifetime, while still enjoying the full tax benefits.
This limit is known as the 'lifetime allowance' (LTA).
The LTA is currently £1,073,100 and was supposed to be frozen at this level until the 2025/26 tax year.
However, the Government has now said the LTA will be completely abolished from 6th April, 2024, meaning there will be no cap on how much you can build up in pension benefits while continuing to get tax relief.
For advice on how the pension changes affect you, please contact Andrew and the team.