Lifetime allowance tax charge abolished
The lifetime allowance tax charge, which imposed a penalty tax charge on pension savings over a certain value (£1,073,100 at the date of abolition), has been removed with effect from 6th April 2023.
The maximum amount of tax free cash available to future retirees is limited to £268,275 unless the individual has a pension protection certificate, in which case their tax free cash allowance will be a larger sum as specified on their certificate.
Holders of pension protection certificates can add to their pensions without losing their tax free cash allowance
Prior to 5 April 2023, it was not possible to continue to fund a pension plan without giving up the right to a protected tax free cash allowance. This has now changed, allowing anyone who holds a protection certificate to retain their protected tax free cash allowance whilst starting to fund their pension again.
Subject to the annual allowance tapering rules detailed below, someone who has not contributed to their pension for the last 3 tax years may (subject to other factors which also need to be considered) be able to contribute up to £180,000 in the current 23/24 tax year.
However, it does need to be mentioned that the Labour party have stated that they intend to reverse the changes to the lifetime allowance regime should they be elected to govern at the next general election. This has led to industry wide concern that any Labour reversal might somehow result in someone who has a pension protection certificate, and has chosen to contribute to their pension in the 23/24 tax year, potentially losing their protected tax free cash allowance under a new Labour government. Whilst in theory it should not be possible for Labour to introduce legislation that retrospectively penalises pension savers in this way, many advisers are, as a consequence, nervous of encouraging clients who have fixed protection to re-start contributions to their pensions.
Annual contribution allowance increases
The annual pension contribution allowance has increased from £40,000 to £60,000 for those who have taxable income of £200,000 or less. Those who have taxable income in excess of £200,000 but less than £360,000 will be entitled to a pension contribution allowance tapering from £60,000 down to £10,000. Anyone with taxable income in excess of £360,000 (with no upper limit) will be able to contribute £10,000 per annum (previously the limit was £4,000).
Retirees who have already started to draw income from their pensions will now be entitled to contribute up to £10,000 per annum back into their pensions (previously the limit on such contributions was £4,000).
Impact of increased corporation tax on company pension contributions
Corporation tax has increased to 25% in the current tax year from 19% in 22/23.
This increases the tax efficiency for company pension contributions and makes it even more appealing for company owner managers to remunerate themselves this way.
Self-employed basis period reform
New basis period rules affect self-employed sole traders and partners from the current tax year onwards and could result in higher taxable profits, which could be mitigated through making pension contributions.
If you have any questions about the recent changes to pensions taxation, please get in touch with your usual Ryecroft Glenton contact.