During the Spring Budget the Chancellor announced some significant changes to pension taxation. Billed as a ‘Back to Work’ Budget the pension changes were aimed at encouraging over 50s back into the workplace. While established retirees may not be tempted back into work by the changes, there are individuals in certain professions, such as NHS consultants and GPs, who may consider working for longer.
The changes will also make a difference to High Earners and those wishing to minimise the impact of rising Corporation Tax such as Entrepreneurs and Business owners. Those who have existing Lifetime Allowance Protection will also benefit.
What are the changes:
Lifetime Allowance – maximum benefits that can be taken from a pension scheme.
The Lifetime allowance is to be entirely removed from 6th April 2023. This means there will be no maximum amount imposed on funds held within a pension. Those who were previously concerned about breaching the Lifetime Allowance will now be able to contribute again.
Maximum tax-free lump sum – This is to remain at £268,275.
Despite the removal of the Lifetime Allowance, the maximum tax-free lump sum is to be capped at £268,275 or 25% of your fund value if it is below £1,073,100.
Those who have a protected Life-time allowance are able to retain their entitlement to a higher tax-free lump sum. Anyone considering breaking their Life-time Allowance will need to tread carefully and seek advice before doing so.
Annual Allowance – maximum amount you can pay into a pension per tax year.
The maximum amount you can pay into a pension and claim tax relief on each year is increasing from £40,000 to £60,000. This will take effect from 6th April 2023.
Business owners will be able to contribute more into employee pensions to help reduce their corporation tax liabilities.
High earners can now benefit from tax relief of up to 58% on personal pension contributions. Good news for those affected by the reduction in the higher rate tax threshold from £150,000 to £125,140
Tapered Annual Allowance – a reduction to the Annual Allowance for those with income above set limits.
Despite the increased Annual Allowance, the Tapered Annual Allowance will still affect those with an adjusted income of over £260,000 per annum. The current minimum is £4000 and this is increasing to £10,000, an increase of 150%.
Money Purchase Annual Allowance – restriction on the amount you can pay into your pension and still receive tax relief once you have accessed your pension flexibly.
The MPAA takes effect when you start to access your pension pot for the first time. The main impact of this change is to individuals who have accessed their pension benefits flexibly. The maximum about that you can continue to contribute is increasing from £4000 to £10,000.
This gives those who wish to return to work the option to join their employer’s workplace pension scheme without being penalised.
Those who have drawn benefits from a Defined Benefit scheme are not impacted by this rule. Retired NHS doctors and consultants will be able to return to work without this restriction being imposed.
(If you think you may have triggered your MPAA or are unsure please contact us)
Summary
Pensions are sometimes viewed in a bad light however, this change in legislation promotes it as one of the most tax efficient investments available with a lot of flexibility.
A pension can now be used as a really tax effective method of passing a trust based, tax efficient investment to your beneficiaries with no upper limit. However, if required it could still be used to provide an income for yourself or the beneficiaries as and when received.
The removal of the LTA is a major benefit to all those that are serious about financial planning and the increase in the AA is extremely helpful and we look forward to helping our client plan for the future with this in our armoury.
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