Pension Changes

Significant changes to pensions have been announced from 6^th April 2023 – how will these affect you?

As you may be aware, the Spring Economic Budget Announcements in March 2023 included some significant changes to pension rules, taking effect from 6^th April 2023. How will these affect you and what benefit can you achieve from these changes with a bit of forward planning?

Annual Pension Contribution Allowance

The first change is to the annual pension contribution allowance. This is the maximum amount of tax relievable pension contributions that may be made by, or on behalf of, an individual during a tax year and includes employer contributions, employee contributions and gross personal contributions.

The standard pension annual contributions allowance was previously set at £40,000 per year but has now been increased to £60,000 per year from 6^th April 2023. Individuals are still able to carry forward unused allowances from the previous three tax years, providing they were members of a registered pension scheme during those years.

This increase could be very advantageous to those individuals with large trading profits or earnings who will obtain additional tax relief if they are able to maximise their pension contributions under the new allowance.

For individuals with “threshold income” (very broadly, total income excluding pension contributions), in excess of £200,000 during the tax year, and adjusted income (very broadly, total income including pension contributions) in excess of £260,000 during the tax year (previously £240,000), the annual contributions allowance is restricted. This works via a tapered reduction of £1 of allowance for every £2 of adjusted income in excess of the £260,000 threshold. The minimum annual allowance available in these circumstances has been increased from £4,000 to £10,000 per annum from 6^th April 2023, again providing an opportunity for additional tax relief via increased constributions.

Pension contributions exceeding the annual contributions allowance for the year and any available brought forward allowances from the previous three tax years will be subject to a tax charge. It is therefore essential that available allowances are calculated before contributions are made.

Removal of Lifetime Allowance Charge

The second big change announced in the Spring Economic Budget update was the intended abolishment of the Lifetime Allowance for pension savings.

Previously, a tax charge applied where the value of an individual’s pension scheme exceeded the Lifetime Allowance, currently set at £1,073,100, in order to limit the total tax relieved value accumulated in a pension scheme.

This tax charge has been removed with effect from 6^th April 2023 and the Lifetime Allowance itself will be abolished at some point in the future.

Capping of Tax-Free Lump Sum

This is one of the less advantageous changes for those with high value pension funds who will benefit from the removal of the Lifetime Allowance charge.

Previously, it was possible to withdraw 25% of the pension funds at retirement as a tax-free lump sum.

With effect from 6^th April 2023, the amount available as a tax-free lump sum will be capped at the lower of 25% of the pension pot or £268,275 (25% of the current lifetime allowance).

In view of these changes, undertaking a tax planning review now may result in some valuable tax relief, and we would be happy to assist with this.

As always, there will be other aspects to consider in addition to the tax impact and we would recommend that advice is sought from an Independent Financial Advisor before any transactions are made.

Declan Donaldson | Declan.Donaldson@renniewelch.co.uk