The Spring Budget was announced on 15 March 2023 by the Chancellor, Jeremy Hunt, where he announced, amongst other things, significant proposed changes to the rules regarding the pensions Lifetime Allowance and to the rules around tax-relievable pension contributions.
The Lifetime Allowance
In a move that appears to have come as a surprise to almost everyone inside and outside of the pensions industry, Mr Hunt announced the proposed abolition of the Lifetime Allowance (LTA). The LTA is the overall amount of pension fund value that a scheme member can accumulate over their lifetime without an additional tax charge arising on its value. Currently, this is £1,073,100 and, in the usual pre-Budget speculation, it was anticipated that it was going to rise to £1.8m. Instead, Mr Hunt made the shock announcement that the LTA would be abolished altogether from 2024 and that no LTA tax charges would be applicable from 6 April 2023 (effectively meaning that pension scheme members will not be affected by an LTA tax charge from that date).
HM Treasury has confirmed that a scheme member’s maximum Pension Commencement Lump Sum (PCLS) will be £268,275 (25% of £1,073,100) regardless of whether or not his/her pension fund value is greater than £1,073,100 and that this figure will be frozen for future years. However, if a scheme member has a greater PCLS entitlement arising from an earlier form of protection, this will continue to apply.
The Annual Allowance, Money Purchase Annual Allowance and Tapered Annual Allowance
In addition to the above, the Chancellor has announced increases to the amounts of pension contributions that can potentially be made in a tax-relievable manner. The Annual Allowance (AA) is currently £40,000 – as it has been for a number of years. From 6 April 2023, this is being increased by 50% to £60,000.
The Money Purchase Annual Allowance (MPAA) affects those scheme members who have flexibly accessed their pensions by taking an income (rather than just PCLS) from the fund. It was designed to deter people from recycling pension drawdown income back into pensions and, in recent years, it has been set at £4,000 per annum. The Chancellor has stated that this will increase to £10,000 per annum from 6 April 2023, meaning that potentially higher contributions can be paid than was previously the case.
The Tapered Annual Allowance (TAA) affects those scheme members whose earnings exceed a certain “threshold income” figure and whose “adjusted earnings” also exceed a certain (but different) figure. The TAA was designed to restrict the amount of tax-relievable pension contributions that a higher earner could pay in / have paid into a pension scheme. Currently, the threshold income figure is £200,000 and the adjusted income figure is £240,000. These figures had each been lower than this but, in an effort to ensure that senior clinicians in the health sector (amongst others) were not impacted by an AA tax charge, the Government increased them by £90,000 from the 2020/21 tax year onwards. From 6 April 2023, the adjusted income figure will increase to £260,000 meaning that fewer people may be impacted by an AA tax charge based on their earnings. In addition, the minimum TAA for those scheme members affected will increase from £4,000 to £10,000 per annum. Hence, someone affected by the TAA, will have an available AA of at least £10,000 in that tax year.
These changes have been announced by the Government to support its “efforts to encourage inactive individuals to return to work” (source: HMRC Policy Paper 15 March 2023). In particular, it has been widely acknowledged that the Government wishes to encourage senior clinicians in the NHS to return to work/continue to work as a result of these measures. However, the changes are not restricted to such scheme members and apply across the board.
Many scheme members might benefit from the changes outlined above – either from 6 April 2023 or at a later date. However, as we have not seen the full detail of the legislative changes required to enact the new proposals, and nor have they been passed into law (as at time of writing), great care should be taken when making any decisions. As ever, scheme members should seek financial advice from their advisers, as pension-related matters can be far more complex than they might at first appear to be.