In his March Budget, the Chancellor announced a number of changes to the pension tax rules, including an increase in the annual allowance and the abolition of the lifetime allowance.
The annual allowance places a cap on tax-relieved pension savings. Individuals can obtain tax relief on contributions to a registered pension scheme of up to 100% of their earnings or, if greater, £3,600 as long as their available annual allowance is sufficient to cover their contributions. Employer contributions are not subject to the earnings limit, but they do count towards the annual allowance.
The annual allowance is increased to £60,000 from £40,000 for the 2023/24 tax year.
Unused allowances can be carried forward for up to three years. However, the current year’s allowance must be used before utilising unused allowances from earlier years.
High earners have a reduced annual allowance. The taper applies where threshold income exceeds £200,000 and adjusted net income exceeds £260,000. Threshold income is, broadly, income excluding pension contributions, whereas adjusted net income includes pension contributions.
The taper reduces the annual allowance by £1 for every £2 by which adjusted net income exceeds £260,000 until the minimum amount of the allowance is reached. For 2023/24, this is set at £10,000. Consequently, individuals with threshold income of at least £200,000 and adjusted net income of at least £360,000 will only receive the minimum allowance of £10,000 for 2023/24.
For 2020/21 to 2022/23 inclusive, the taper applied where adjusted net income exceeded £240,000 and threshold income exceeded £200,000, reducing the allowance by £1 for every £2 by which adjusted net income exceeded £240,000 until the minimum allowance of £4,000 was reached.
The lifetime allowance places a cap on lifetime tax-relieved pension savings. It is set at £1,073,100. If tax-relieved pension savings exceeded the lifetime allowance, a tax charge applied for 2022/23 and earlier tax years. The charge was set at 55% of the excess where this was taken as a lump sum and at 25% of the excess where it was taken as a pension. The lifetime allowance charges are abolished from 6 April 2023. Legislation in a future Finance Bill will abolish the lifetime allowance. This paves the way for individuals whose pension pot has reached £1,073,100 to start making pension contributions again.
As a result of these changes, a cap is placed on the amount that can be taken as a tax-free lump sum. This is now 25% of the pension pot or, where lower, £268,275. The figure of £268,275 is 25% of the lifetime allowance of £1,073,100.
The money purchase annual allowance (MPAA) is a lower annual allowance that applies where a person has flexibly accessed their pension pot having reached the age of 55. The MPAA is set at £10,000 for 2023/24.
Partner note: Finance (No. 2) Bill 2022–23, cl. 18–22; FA 2004, ss. 214, 218, 227ZA, 228, 228ZA; SI 2020/342, reg. 2.