Pension Allowance changes from 06th April 2023 were announced in the Spring Budget 2023.
Pension Allowance changes from 06th April 2023 will affect individual members of registered pension schemes who make annual pension contributions over the standard annual allowance (AA), money purchase annual allowance (MPAA), or tapered annual allowance (tapered AA), and who therefore expect to become subject to an AA charge.
Pension Allowance changes from 06th April 2023 will also affect Individual members of registered pension schemes who already have or expect to have pension savings exceeding either the standard lifetime allowance (LTA) or their protected LTA, and who therefore expect to become subject to an LTA charge.
Scheme administrators of registered pension schemes will be affected by the Pension Allowance changes from 06th April 2023 as they will need to modify their processes to accommodate changes to the AA and LTA.
What is the Annual Allowance (AA)?
The AA is the maximum amount of pension savings an individual can make each year with tax relief without incurring a tax charge which aims to effectively recoup some of the tax relief given.
Under sections 227-228, the AA sets a limit on the tax-relieved amount an individual can input to a registered pension scheme in a tax year. Under section 214, the LTA sets a limit on the total tax-relieved pension saving an individual can have over their lifetime.
The AA was set at £215,000 when introduced, but it was increased incrementally to £255,000 by 2010/11. It was then reduced in 2011 and again in 2014 and is now £40,000.
What is the Money Purchase Annual Allowance (MPAA)?
The MPAA is a reduction to the AA for individuals who have flexibly accessed their money purchase pension savings. The tapered AA is a reduction to the AA for individuals with income above set levels.
The MPAA was introduced by section 227ZA when pension flexibility was introduced in 2015. It aims to prevent individuals from recycling their money purchase pension savings. It was originally £10,000 and was reduced to its current level of £4,000 in 2017.
The tapered AA was introduced in 2016 by section 228ZA. The original starting point for the taper was £150,000 but rose to its current level of £240,000 in 2020.
What is the Lifetime Allowance (LTA)?
The LTA is the maximum amount of tax relievable pension savings an individual can benefit from over the course of their lifetime. Individuals may contribute to their pension over these limits, but they will be subject to a tax charge on the amount above the allowance.
The excess is taxed either at 55% where taken as a lump sum or at 25% where taken as a pension. Most individuals are subject to the standard LTA. However, when the LTA was introduced, and each time it has been reduced, protections have been offered to safeguard individuals who had already built-up significant pension savings on the expectation of a certain level of LTA.
Individuals may be able to receive a tax-free lump sum when they become entitled to their pension benefits: a pension commencement lump sum (PCLS). The maximum amount that most individuals can claim as a PCLS is currently 25 per cent of their available LTA at the time this sum is taken.
The LTA was set at £1.5m when introduced, but it increased incrementally to £1.8m by 2011/12. The LTA was then reduced in 2012, 2014, and 2016 by pension allowance changes. When frozen in 2016, there was a provision for the LTA to have a CPI-based increase from 2017 to 2018; however, this was switched off in 2021. The current standard LTA, therefore, remains at £1,073,100.
What are the Pension Allowance changes from 06th April 2023?
Pension Allowance changes from 06th April 2023 include the following revisions:
- – Increase the Annual Allowance (AA) from £40,000 to £60,000;
- – Increase the Money Purchase Annual Allowance (MPAA) from £4,000 to £10,000;
- – Increase the income level for the Tapered Annual Allowance to apply from £240,000 to £260,000;
- – Ensure that nobody will face a Lifetime Allowance (LTA) charge from April 2023;
- – Limit the maximum an individual can claim as a pension commencement lump sum (PCLS) to 25% of the current LTA (£268,275), except where protections apply;
- – Change the taxation of the LTA excess lump sum, serious ill-health lump sum (SIHLS), defined benefits lump sum death benefit (DBLSDB), and uncrystallised funds lump sum death benefit (UFLSDB), where they are currently subject to a 55% tax charge above the LTA, to taxation at an individual’s marginal rate;
Legislation will be introduced in a future Finance Bill to remove the LTA from pensions tax legislation.
How can you make the most of these Pension Allowance changes?
If you were planning to withdraw money from your pension, you should hold off until April 6 and the new tax year.
If you were holding back pension contributions, either because you didn’t want to hit the lifetime allowance. or because you risked breaching the annual allowance, you can now pay much more from April 6 onwards as the lifetime allowance will be gone and the annual allowance will increase to £60,000. The tapering rules still apply if you earn over £260,000 but you can contribute £10,000 from April 6 onwards as opposed to the £4,000 under the current rules.
How can MCL Accountants help?
Contact MCL Accountants on 01702 593 029 if you would like further information about Pension Allowance changes or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.
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Ishan provides financial management, taxation and transactional advice to business entities of all sizes. His expert areas include statutory compliance, business taxation, personal tax & transactional processing and systems. Industry sectors include professional services, retail, hospitality and entertaining & media and advertising services.