Published on 21st March ahead of the new tax year starting on 6th April, the Spring Budget 2023 introduced a range of reforms for pension tax allowances. With more scope for pension savings, these new measures mean it’s a good time to review your retirement planning strategy.
The pension tax change making the biggest splash is the scrapping of the Lifetime Allowance (LTA) for pensions. This tax-free cap has been the cornerstone of pension tax planning since 2006, but rather than increasing the allowance to help pension savers, Chancellor Jeremy Hunt made the surprise move of abolishing the Pension LTA altogether.
The Spring Budget announcement also included several other significant adjustments to pension rules for the 2023–2024 tax year and beyond. Let’s take a look at the new measures to explore how they might affect you and your financial plans for retirement.
Why is the government abolishing the Pension LTA?
The Pension Lifetime Allowance (LTA) is the amount of money you can build up in your pension pot over your lifetime without having to pay an extra tax charge when you withdraw it. This was first introduced in 2006 by Gordon Brown and viewed as a kind of ‘wealth tax’ on the biggest savers, triggering a 55% tax charge for exceeding the LTA.
This allowance started at £1,500,000 in 2006, before increasing to £1,800,000 in 2010–2012, and gradually decreasing until being frozen at £1,073,100 from 2020–2026. This figure may seem more than enough for the average person with minimal pension savings, but it had the unintended consequence of affecting senior public service workers with high final salary pension schemes.
This meant that NHS employees, for example, were deterred from working and saving for longer by the high tax charge – contributing to NHS staff shortages. Chancellor Jeremy Hunt specified in his Spring Budget speech that the aim of removing the LTA is to encourage such senior workers to remain in the workforce for longer, or even to return to work after retiring early.
The abolition of the Pension LTA won’t just help NHS doctors and senior staff, though. Anyone who was considering retirement to avoid triggering the tax charge may now be incentivised to work for longer, keeping more experienced mid-to-high earners in employment.
To clarify, the pension savings cap will not be completely abolished until April 2024–2025, but LTA tax charges have been scrapped from April 2023–2024. This means you can contribute as much as you like to your pension savings from 6th April 2023 without worrying about the LTA charge, and anyone who withdraws their excess as a lump sum from this date onwards will only pay income tax rather than the much higher 55% LTA tax.
Is the Spring Budget changing other pension tax rules?
As of 6th April 2023, the Pension Lifetime Allowance has been reduced to 0%, and it will be fully removed next year with the 2024 Finance Bill. However, this isn’t the only change that pension savers should be aware of. Additional pension measures in the Spring Budget included:
- Increasing the annual tax-free allowance from £40,000 to £60,000 (though previous limits will apply when carrying allowances forward from the previous 3 tax years).
- Increasing the minimum tapered annual allowance for high earners from £4,000 to £10,000
(plus adjusting the income threshold for this from £240,000 a year to £260,000). - Raising the Money Purchase Annual Allowance (MPAA) cap from £4,000 to £10,000 (the amount you can contribute to pension savings after accessing the pension from age 55).
These changes are mostly positive for pension savers, as they offer more tax relief. That said, the tax-free lump sum cap still remains – so the amount you can take out at commencement without being taxed is frozen at £268,275 (25% of the LTA).
Most people will welcome the increased pension allowances, especially considering that many other tax allowances – including personal income tax – have been frozen until 2028, and inflation continues to push workers into higher tax bands thanks to fiscal drag.
What does abolishing the Pension Lifetime Allowance mean for you?
If your combined pension savings are getting closer and closer to the Lifetime Allowance (LTA), the Spring Budget reforms could give you the opportunity to continue working while boosting your pension contributions for longer.
Of course, you’ll still have to be wary of other tax traps – your personal circumstances and where you live as a UK citizen will also affect your pension tax liabilities. Additionally, these rules could change again in the near future, as the Labour Party claims it will reintroduce the LTA
but with special exemptions for NHS doctors if Labour wins the next General Election.
Before taking any action regarding your pension, you may want to seek professional financial planning advice. At GBAC, our accountants in Barnsley offer efficient tax planning services that could help you get the most out of your retirement fund.
Give our team a call on 01226 298 298 to arrange a consultation and learn more about how our accounting services could benefit you and your financial future.