Jeremy Hunt’s first full budget was expected to be a straight-forward affair, but he surprised everyone by making some major changes to pension legislation.
Contribution Levels
The Standard Annual Allowance – the maximum amount that can be put into a pension, with full tax relief at your highest rate has been increased from £40,000 to £60,000 per annum.
In addition, the additional rate of tax (45%) is now scheduled to come into effect, once taxable income exceeds £125,140 – a level of income that would also see the taxpayer losing their entire personal allowance. Those with taxable income of up to £160,000 can now make pension contributions of £60,000 gross each year to restore their full personal allowance. The effective rate of tax relief would be 51.3% for someone with a taxable income of £160,000 who takes full advantage of the full £60,000 allowance.
Tapered Annual Allowance (TAA) – in a double boost to very high earners, the adjusted threshold income, which would see the implementation of a tapering of the maximum pension contributions, has increased from £240,000 to £260,000pa with the maximum resulting contribution also increasing from £4,000pa to £10,000pa. The total income required, before the annual allowance is reduced to the lowest level is now set to be £360,000.
Money Purchase Annual Allowance (MPAA) – People who have flexibly accessed their pensions, by taking some form of flexible income, were previously limited to maximum tax-relievable pension contributions of £4,000. This level has also increased to £10,000 in a tax year.
Opportunities Provided By The Changes To Maximum Pension Contribution Levels:
Companies – a greater opportunity to exit money from the company tax efficiently. “Wholly and exclusively” contributions could obtain relief from Corporation Tax at a rate of up to 25% and also avoid employer’s National Insurance contributions.
High earners who had previously maximised pension contributions, should revisit their circumstances to see if further contributions are now available.
People with a total income above £100,000 will now have an even greater opportunity to reclaim their Personal Allowance.
People earning above £125.140 could consider making pension contributions and minimising or avoiding paying the 45% Additional Rate of Tax. People who have triggered the MPAA should review their circumstances to see if they can make further contributions into their pension plan.
Lifetime Allowance (LTA) – Probably the biggest surprise of the budget was the suspension (and, in April 2024, the abolition) of the Lifetime Allowance. The LTA was created in 2006 during a process called Pension Simplification and provides a maximum level of pension savings that can be accrued before HMRC start to claw back tax relief, by way of a Lifetime Allowance charge. Because the LTA will be abolished rather than increased, the change will even benefit those who have already used up all of their LTA.
Any existing LTA protections that a saver has obtained will still be valid, which could mean that a higher level of Tax-Free Cash will still be available at retirement. Importantly, any further pension accrual/contributions can be made in 2023/4 without risking losing existing pension protections. One sting in the tail, however, is that the maximum tax-free cash payable will be frozen at 25% of the current LTA i.e. £268,275 indefinitely.
Opportunities Provided By The Removal Of The LTA
Any clients who have benefits in excess of the LTA and are about to crystalise those benefits, should consider deferring the taking of the benefits until after the 5 April 2023. Please don’t rush to take benefits out of the pension until you have spoken to us. The pension still offers serious Inheritance Tax (IHT) benefits that you may not wish to miss out on.
Pension savers who stopped/reduced paying contributions, due to fears of exceeding the LTA, should review their circumstances to see if starting contributions is suitable.
With the LTA will be abolished rather than increased, the change will even benefit those who have already used up all of their LTA. Clients may benefit from making further contributions.
Any pension savers who have moved their funds into lower risk investments, to due to LTA concerns, should review this position.
We will keep you updated as the legislation passes through Parliament, but please make sure you contact us if you think that any of these changes provide you with extra options to provide for your desired lifestyle.
Seek independent financial advice before making any decisions. The content of this article is for information only and should not be seen as advice or a recommendation to take action.