The Spring Budget was announced on 15 March and the Government has made some significant changes relating to pensions and allowances. So, what does it mean for you and your retirement savings?
Spring Budget – key pension changes
- The Lifetime Allowance will be scrapped from 6 April 2024
- The Annual Allowance for pension contributions will increase from £40,000 to £60,000 from 6 April 2023
- The minimum Tapered Annual Allowance for certain high earners will increase from £4,000 to £10,000 from 6 April 2023
- The Money Purchase Annual Allowance (MPAA) for those who’ve flexibly accessed their pension funds, has been increased from £4,000 to £10,000 from 6 April 2023
Let’s go into detail about what these changes might mean for you.
1. The Lifetime Allowance will be scrapped
The Lifetime Allowance is a limit on the total amount of pension savings you can build up across all your pension pots, before you pay a tax charge when taking pension benefits from these savings. The current Lifetime Allowance is £1,073,100.
In the Spring Budget, the Chancellor, Jeremy Hunt announced that the Lifetime Allowance would be completely scrapped from 6 April 2024. This means that most people will be able to save more into a pension without facing higher rates of tax when they come to take an income from it.
Until this officially comes into effect in April next year, the Government have also announced changes to the current tax charge when taking certain lump sums (a one-time payment from your pension) for those who exceed the lifetime allowance. From 6 April 2023, the tax charge will be reduced from a fixed 55% to your marginal rate of income tax. By marginal rate, we mean the standard percentage of tax you pay based on your earned income – which is typically between 20-45%. You can check what your marginal rate of tax is on the Government’s website.
While scrapping the Lifetime Allowance means you can save more into your pension pot, don’t forget that you’ll still pay income tax when taking an income from your pension pot. You can currently take a tax-free lump sum of 25% of your fund value or your remaining lifetime allowance (whichever is lower) until 6 April 2023. But after this, the maximum amount you can take as a tax-free lump sum will be frozen at 25% of the 2022/23 lifetime allowance of £1,073,100, i.e. £268,275. Regular monthly or annual annuity or drawdown income payments will be taxed at your marginal rate of income tax.
2. The Annual Allowance will increase from £40,000 to £60,000
The Annual Allowance is the amount you or your employer (or someone on your behalf), can save into your pension pots in a single tax year (6 April to 5 April) without incurring a tax charge. Currently the annual allowance is £40,000, but in the recent Budget announcement, this has been increased to £60,000 from 6 April 2023. This means you can now save up to £60,000 tax free into your pension each tax year which is 50% more than can currently be saved.
The existing three year carry forward rules will also still apply. This means that if you don’t use up your full annual allowance in a single tax year, you can carry forward the unused amount into any of the next three tax years.
For the 2023/24 tax year, any unused annual allowance can be carried over from the tax years 2020/21, 2021/22 and 2022/23. You would need to use the £60,000 annual allowance first and then carry over any unused annual allowance from the previous tax years. For example, (assuming the standard annual allowance applies to you):
- Say, in tax year 2020/21 you’ve paid £20,000 of your £40,000 allowance, this means you can carry forward £20,000.
- In tax year 2021/22 you’ve paid another £20,000, so can carry forward an additional £20,000 on top of your existing £20,000, making a total of £40,000 you can carry forward.
- In tax year 2022/23 you pay in £40,000, using up all that year’s annual allowance, but you can still carry forward £40,000 from tax years 2020/21 and 2021/22.
- This means in tax year 2023/24 you can pay in a total of £100,000 – your £60,000 annual allowance, plus the £40,000 you’ve carried forward.
Remember that you need to have enough relevant UK earnings (for example earned income), to be able to pay pension contributions that attract tax relief. So, in the example above, you would need to earn at least £100,000 in tax year 2023/24 to be able to receive tax relief on the full pension contribution amount.
3. The minimum Tapered Annual Allowance will increase from £4,000 to £10,000
The Tapered Annual Allowance is an allowance that impacts certain higher earners. It reduces your annual allowance if your total income in a year exceeds both a ‘threshold income’ of £200,000 and you have an ‘adjusted income’ above £240,000.
For every £2 of income above the ‘adjusted income’ limit of £240,000, your total annual allowance will be reduced by £1. At present the most the annual allowance could be reduced to is £4,000 – but after the Spring Budget announcement this is increasing to £10,000 from 6 April 2023. The ‘adjusted income’ limit has also been increased from £240,000, to £260,000 – meaning your annual allowance won’t start being reduced until your ‘adjusted income’ goes above this figure. If you have a ‘threshold income’ of £200,000 but your ‘adjusted income’ is less than £260,000, then your annual allowance won’t reduce.
4. The MPAA will increase from £4,000 to £10,000
While the annual allowance applies to people who haven’t yet started taking an income from their pension, the MPAA applies to those who have already flexibly accessed their pension, for example by taking an uncrystallised funds pension lump sum or by taking an income from a flexi-access drawdown plan.
Currently this means the maximum you, your employer, or someone on your behalf, can pay into your money purchase pension each tax year before facing tax charges is £4,000. However, the Government has now increased this allowance to £10,000 from 6 April 2023. This is good news for those people already withdrawing from their pension but who also might want to continue topping it up. It may also make it more desirable for anyone who may want to return to work after retiring, as you’ll be able to take more advantage of your employer’s workplace pension contributions.
Make the most of the Spring Budget pension changes
Many of the pension announcements at the Spring Budget will be of most benefit to higher earners. It allows you to save more without facing such high tax charges. If you’re considering a return to work but already taking income from your pension, you’ll benefit from a higher limit on continued pension contributions before being taxed.
If you want to find out more, check out the Government’s Spring Budget announcement.
All statements in our article are taken from the Spring Budget announcement on 15 March 2023, and are accurate at time of writing.
Tax treatment depends on individual circumstances and taxation levels which may change. This information is based on our understanding of current taxation law and HMRC practice, which may also change.