Spring Budget 2023 sets out important pension changes

Senior tax consultant Robert Redfern examines some significant changes to pensions introduced in the Spring Budget.

The Spring Budget made four major changes to pension allowances with the intention of increasing the opportunity for individuals to increase their pension savings.

Four major pension changes

1.     Pension annual allowance increase

The pension annual allowance is the total amount you can save into your pension each tax year before you have to pay tax. Before the budget, it was the lower of £40,000 or your total earnings. From 6 April 2023, this is going up to £60,000.

2.     Tapered annual allowance changes

As we wrote about here, the pension annual allowance will be tapered if an individual has ‘threshold income’ of more than £200,000 and ‘adjusted income’ of more than £240,000 (£260,000 from 6 April 2023). Depending on the level of this income, the annual allowance could be reduced to a minimum of £4,000, but this lower limit will now be increased to £10,000 from 6 April 2023.

3.     Lifetime allowance (LTA)

Before 6 April 2023, where the total value of pensions during an individual’s lifetime exceeded the LTA of £1,073,000, lifetime tax charges were applied to the excess. These were 55% of any amounts paid as a lump sum and 25% of any amounts paid as income.

The lifetime tax charges have been withdrawn, enabling individuals to increase their pension savings without facing excess pension savings charges. The LTA is relevant for the purposes of the tax-free lump sum, with the maximum tax-free lump sum being the lower of 25% of: 

·      An individual's total pension savings, or

·      £1,073,000, being £268,275.

Income tax at an individual’s marginal rate will be applied to any pension savings not taken as a tax-free lump sum, for example, where they are received as a regular annuity or drawdown payments.

Individuals with certificates to protect a higher LTA may benefit from a higher tax-free lump sum, and we can assist with reviewing the tax position. We recommend tax advice is sought before resuming pension savings to safeguard against any potential loss of protection.

4.     Money purchase annual allowance (MPAA) changes

The MPAA may apply to individuals who have already flexibly accessed their pension. From 6 April 2023, the amount that can be paid into your pension each tax year before facing tax charges is £10,000 (previously, it was £4,000). The intention is to make it more desirable for people to return to work who may want to continue topping up their pension.

If you would like to discuss any of the issues addressed above, please contact Robert Redfern at robert@sandersgroup.co.uk. 

Please note that this article's content is for information purposes only and should not be relied upon as formal advice.