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The Chancellor of the Exchequer, Jeremy Hunt, spelled out his Spring Budget plans on 15 March 2023. Please find below a summary of the key changes to the pensions taxation which may be of interest to you as a member of the Baxi Group Pension Scheme.
Annual allowance
For defined contribution (DC) members, there is a limit on the total amount of pension contributions that can be paid by you and your employer each tax year before a tax charge might apply, known as the Annual Allowance.
For defined benefit (DB) members, the Annual Allowance limits the total amount of pension that you can build up over the tax year before a tax charge may apply.
In the 2023 budget, it was announced that the standard annual allowance would be increasing to £60,000 (from £40,000) for the tax year 2023/24.
For very high earners, the Annual Allowance reduces as your income increases and this is called the Tapered Annual Allowance.
If you have adjusted income* of over £260,000 per year in the 2023/24 tax year, you may be impacted by the Tapered Annual Allowance. This tapers the annual allowance down to £10,000 per year (previously £4,000) for those with an adjusted income of £360,000 or more.
Please note, the adjusted income threshold has changed from £240,000 in the 2022/23 tax year, as announced in the 2023 Budget.
*Adjusted income is your annual income – broadly all income that you are taxed on including dividends, savings interest and rental income – before tax plus your pension savings over the year. For a DC member, your pension savings will be based on the value of your own and any employer pension contributions. For a DB member, it will be calculated by reference to the increase in the value of your pension over the year.
Lifetime Allowance
The Lifetime Allowance limits the total amount you can build up in pension benefits over your lifetime while still enjoying the full tax benefits. If your total benefits exceed the lifetime allowance, a tax charge called the lifetime allowance charge applies.
In the 2023 budget, the government announced that the lifetime allowance charge will cease to apply from 6 April 2023 onwards. The lifetime allowance itself will be abolished completely in future legislation, with effect from 6 April 2024.
Whilst this is good news for pension savers with large benefits, you should be aware that the position may change in the future. This is because the Labour Party has said that it will reinstate the lifetime allowance and the lifetime allowance tax charge, if it gets into power at the next election.
Maximum tax free cash
In addition, the government announced that the maximum amount of tax free cash an individual can take at retirement will be permanently capped at £268,275 (25% of the Lifetime Allowance for 2022/23) unless the individual has a protected right to a higher amount.
Some individuals may have some protections including a higher protected amount of tax free cash. It is not yet clear what conditions, if any, might be attached to retaining these protections so individuals with such protections should take advice before making any changes to their pension saving.
Money Purchase Annual Allowance (MPAA)
The MPAA applies if you have flexibly accessed part or all of your pension savings from defined contribution arrangements. You can find out more about the MPAA at: Money Helper – MPAA.
If you are subject to the MPAA, from the 2023/24 tax year, you will be able to pay up to £10,000 (previously £4,000 in the 2022/23 tax year) of contributions into your DC pension savings each tax year and you will receive full tax relief on it. This amount includes contributions made by your employer. If you go over this amount, you will be personally responsible for paying the tax due on any additional contributions.
This announcement summarises the headline changes, but some details have yet to be published. The tax changes may also affect different individuals in different ways. Please note that pensions taxation allowances have been changed in the past and may be changed again in the future. We cannot advise you on the best course of action for your particular circumstances. We strongly recommend that you get financial advice before making any changes to your pension. You can visit Money Helper (previously the Money Advice Service) to source your own financial adviser if you don’t already have one.
Please contact Buck, the Scheme Administrator, if you have any questions. Their contact details are 0330 123 9581 and baxipensions@buck.com.