One of the big headlines from the Chancellor’s budget for 2023 was changes to the tax limits on pension savings. To make sure you’re updated on what this might mean, we’ve created a quick summary of the terms and changes.
The Annual Allowance
The Annual Allowance is the maximum amount of money both you and AXA can pay into your pension each tax year. This includes any contributions you make to other pension schemes (i.e., if you have a personal pension plan). If you go above the annual allowance, you will have to pay a tax charge on the excess. This annual allowance has remained at £40,000 since 6 April 2016.
The Chancellor announced this cap would be rising from £40,000 to £60,000 from 6 April 2023.
The Tapered Annual Allowance
The Tapered Annual Allowance is the point at which the Annual Allowance is reduced for high-income individuals. Until 5 April 2023, affected members will have their Annual Allowance reduced by £1 for every £2 their ‘adjusted income’ is over £240,000. This continues until the minimum allowance is reached, which until 5 April 2023 is £4,000.
Adjusted income is taxable income, plus pension contributions, including those from your employer. The government website has more information on how to calculate income for the Tapered Annual Allowance at www.gov.uk/guidance/pension-schemes-work-out-your-tapered-annual-allowance.
The level of adjusted income needed for the Tapered Annual Allowance to apply will be increasing as at 6 April 2023 from £240,000 to £260,000, with the minimum allowance also increasing from £4,000 to £10,000.
Money Purchase Annual Allowance
When you start drawing money from a defined contribution pension, the amount you can pay into any other defined contribution pensions without paying a tax charge is limited by the Money Purchase Annual Allowance.
The Money Purchase Annual Allowance is now also due to increase from £4,000 to £10,000, to keep it in line with the minimum Tapered Annual Allowance.
The Lifetime Allowance
The Lifetime Allowance is the maximum amount an individual can take from all their registered pension schemes without incurring additional tax charges. This does not include the State Pension. A 55% tax charge is applied to amounts above this threshold withdrawn as a lump sum, or 25% if paid as a pension. The Lifetime Allowance for the 2022/23 tax year is £1,073,100.
The budget removed the tax charges for amounts exceeding the Lifetime Allowance for the 2023/24 tax year, and the Lifetime Allowance will be abolished completely from 6 April 2024.
Pension Commencement Lump Sum (PCLS)
When you start drawing your pension you can choose to receive a tax-free lump sum payment of up to 25% of your pension. The maximum amount you can claim tax free is currently £268,275 (which is 25% of the current Lifetime Allowance).
The PCLS amount will be frozen at £268,275, even though the Lifetime Allowance is being removed.
For more information on pensions legislation and taxation, take a look at the pensions page of the government website www.gov.uk/browse/working/workplace-personal-pensions
If you’re not sure how these changes will affect you or want more information about the budget, the government’s MoneyHelper website has a useful article and contact details for further help. www.moneyhelper.org.uk/en/blog/everyday-money/what-the-2023-spring-budget-means-for-you
If you’d like advice on your pension savings, the MoneyHelper website also has a section on financial advice here www.moneyhelper.org.uk/choosing-a-financial-adviser