Arguably the most eye catching announcement on Budget day was that the pension lifetime allowance, which is the amount that can be saved into a pension during a person’s lifetime without a penalty tax charge being incurred, will be removed entirely from 6 April 2023.
Whilst Labour were quick to spoil the party by promptly announcing that they would reverse the change should they win the next election, the pending 6 April changes open up pension funding opportunities that should not be ignored.
We will not know the full detail of proposed changes until the new legislation has passed into law at some point in April but a brief summary of what we know now is set out here.
Limited tax free cash
Although the current lifetime allowance of £1,073,100 is set to be abolished, the maximum amount of tax free cash that can be drawn from a pension will be limited to £268,275 (being 25% of the current £1,073,100 lifetime allowance).
However, anyone who has a form of protected lifetime allowance (called Fixed or Enhanced Protection) will be exempt from this limitation on tax free cash. Anyone with Fixed Protection will be able to continue to rely on their existing protected tax free cash allowances and anyone with Enhanced Protection which allows unlimited tax free cash growth, will have their tax free cash entitlement fixed based on the pension value at 5 April 2023.
Changes don’t take effect until 6 April
This is an important point: the new changes don’t take effect until 6th April so anyone unfortunate enough to have a 75th birthday before 6th April or to die before then, will be assessed under the current £1,073,100 lifetime allowance regime and a penalty tax charge will fall due if appropriate.
Its also important to note that the changes to the annual pension contribution rules (detailed below) don’t take effect until 6th April.
What contributions can be made from 6th April?
The current annual pension contribution allowance is £40,000 per annum, with the ability to ‘carry forward’ unused allowances from the 3 previous tax years.
From 6th April, the annual pension allowance increases to £60,000 though the carry forward allowances remain at a maximum of £40,000 for the 22/23 and previous tax years.
Higher earners (classified as those with taxable income in excess of £200,000) may have what is called a ‘tapered’ annual pension allowance, which reduces from £60,000 down to a minimum level of £10,000 (the minimum level is only £4,000 up to 5th April) depending on the level of taxable income and the value of any employer pension contributions made.