id
On 16 March, Jeremy Hunt set out his plans to get the UK economy back on track and get inflation under control. He made it clear that the focus of his announcement was economic growth, and a big part of his growth plan was to get people back to work – including early retirees. As a result, he made some major changes to pension allowances. Here’s how those changes could impact you.
Key pension changes from the 2023 Spring Budget:
- The pension annual allowance will increase from £40,000 to £60,000
- The money purchase annual allowance will increase from £4,000 to £10,000
- The tapered annual allowance will be updated
- The lifetime allowance will be removed entirely
How have my pension allowances changed?
Pension annual allowance changes
The pension annual allowance is the total amount you can save into your pension plans each year before you have to pay an additional tax charge. This includes payments from you, your employer and any third party. It was either £40,000 or your total earnings – whichever is lower. But it’s now going up to a maximum of £60,000 on 6 April 2023.
Money purchase annual allowance changes
If you access any taxable money from your pension plan - either through a drawdown arrangement or from cashing in your pension savings - then you may see your allowance reduce. The amount you can save into your plan will usually reduce from £40,000 to £4,000. This is known as the money purchase annual allowance.
The Chancellor announced that this will go up from £4,000 to £10,000 – making it easier for you to keep working and saving once you’ve taken money from your savings, if you want to.
This might be particularly useful for anyone who dipped into their pension plan to help top up their income during the pandemic or while costs are so high.
Tapered annual allowance changes
If you’re a higher earner then you might have been impacted by an allowance known as the tapered annual allowance. This gradually reduces the amount you can save into your pension plan each tax year depending on your earnings. Your allowance wouldn’t reduce to any lower than £4,000. This lower limit will be increased to £10,000 in the new tax year.
Lifetime allowance changes
The lifetime allowance is the total amount you can build up in all your pension savings in your lifetime without facing a tax charge when you come to take them. If your pension savings are worth more, you’d need to pay a tax charge on anything over the allowance – also known as the ‘excess’.
The lifetime allowance is currently £1,073,100 – and we were told in the 2021 Spring Budget that it would stay there until 2026. The Chancellor however announced that the lifetime allowance will be removed completely, and no one will face a lifetime allowance tax charge from 6 April 2023.
It’s good news for you if you were finding yourself close to or already impacted by the previous allowance. It means you can give your pension savings a boost without worrying about paying any extra tax. Or, if you were planning to take your pension money soon but found you were over the previous allowance, you might now avoid up to 55% in tax charges.
Keep in mind, for most people, the amount you can take as your tax-free entitlement will stay at 25% of the previous lifetime allowance limit of £1,073,100.
Please remember
Pension plans are investments. They can go down as well as up in value and may be worth less than what was paid in.
Tax rules and legislation may change and your individual circumstances and where you live in the UK will have an impact on the tax you pay.
The information here is based on our understanding in March 2023 and should not be taken as financial advice. If you’re unsure please speak to a financial adviser.