Spring Budget 2023: pensions tax changes

The abolition of the lifetime tax allowance

This is generally a welcome move and will mean that many people who would have been impacted by charges will now not have them applied. The lifetime allowance (LTA) isn’t being abolished until 2024, although any LTA charges will not be levied after the end of this tax year.

In addition to this and to take account of the abolition of the LTA, the tax-free cash (TFC) amount will be restricted to £268,275. This shouldn’t impact those with previous lifetime allowance protection, although full details of this are yet to be seen.

There will be many who have paid charges this year or who are hitting age 75 in this tax year, and we are unable to determine yet if they will have any retrospective protections.

The increase of the money purchase annual allowance to £10,000

Although this is a positive step, retaining the MPAA in some form still causes confusion and won’t have the same impact that it could have had if it was scrapped.  

The push to get people who may have retired early back into work will have meant the need to increase this back to a more sensible level. £4,000 put too much of a restriction on those returning to work as it would either mean additional tax charges on individuals, costs to employers to provide alternative contract options, or just a disincentive to re-join the workforce.

The MPAA has been challenged since its introduction. When it was £10,000 it was less of an issue but the drop to £4,000 caught more people out and we believe increased those receiving tax charges.

The increase of the annual allowance to £60,000

The £40,000 annual allowance and available carry forward has been sufficient for many over recent years, and the greatest impact of the annual allowance is seen in defined benefit schemes where the amount deemed to be saved can’t be controlled to the same extent as defined contribution schemes. In defined benefit schemes, inflation and salary increases can play a large part in the amount set against this allowance. The increase should go some way to helping those in the public sector where the pension scheme forms a large part of their remuneration packages.

This additional amount that can be saved each year will hopefully also help those such as the self-employed or entrepreneurs who may not be in the position to save on a regular basis but want to increase their contributions when times are good or later in life when they are more stable and settled in their businesses. Savings by the self-employed are always lower than those who are in employment and with restrictions on annual savings amount it is hard for them to catch up.

The decision not to scrap the tapered annual allowance

It is a little surprising the tapered annual allowance hasn’t been done away with alongside the other changes announce today, although it does mean that the policy to reduce tax relief for the highest earners has been retained. The above changes have been factored into the taper and this being now tapering down to £10,000 and not the previous £4,000.

The tapered annual allowance has been very contentious since its introduction, restricting the amount that can be saved tax efficiently by those deemed “high earners”. The increase of the limits helped a little in the past, but it is still a very complex calculation for those without advisers or pension savvy accountants to deal with.

By not scrapping this we still have the situation where many can’t determine the amount they could save into their pension until it is too late to do so, because it is determined by total taxable income in the tax year in which the contribution is made. This means that it is still very important to get good, qualified advice in this area.

Claire Trott, St. James’s Place Wealth Management