Changes to pensions

A variety of changes were announced in the Government’s 2023 Spring Budget which were designed to increase the tax relief available on pensions.

The changes impact the following areas:

1. The annual allowance
2. The tapered annual allowance
3. The lifetime allowance
4. The money purchase annual allowance.

How the tax relief operates

Depending on whether someone is contributing to a workplace pension scheme or a private pension, the tax relief operates differently. Generally, when paying into a workplace scheme, the relief is immediate as the employer deducts the contributions from the salary before any tax is charged.

However, with a private pension the contributions are made from an individual’s own savings which have already been taxed. In order to provide the tax relief, the Government automatically provides an additional 20% payment into the pension fund. For example, if an individual makes a contribution of £1,000, the Government will add £250 to the fund.

The £1,000 in the above example is the “net” contribution and the £1,250 is the “gross”.

For higher and additional rate taxpayers, further tax relief is obtained on personal pension contributions through a Self Assessment tax return.

The annual allowance

The maximum amount that an individual can contribute into their pension in a tax year whilst still attracting tax relief is capped at the higher of the following:

• The basic amount (currently £3,600)
• The annual allowance (formerly £40,000 now increased to £60,000)
• An individual’s relevant earnings.

Relevant earnings are broadly considered to be employment or self-employment income. Most rental income does not qualify as relevant earnings. If your relevant earnings are below £40,000 the change to the annual allowance will not impact you.

The basic amount is the minimum contribution that any individual can make to their pension, regardless of whether they have an income. It is important to note that £3,600 is the gross amount (inclusive of the tax relief), the maximum net contribution that an individual can make is £2,880.

The annual allowance has been increased from £40,000 per annum to £60,000 (gross), meaning that those with income over £40k (but below £260k), can increase their annual contributions by £20,000 and obtain up to an additional £5,000 per year in tax relief.

If an individual contributes to their pension in excess of the cap, the tax relief they have obtained will be clawed back through their annual Self Assessment tax return.

Both employee contributions and employer contributions as well as the Government’s 20% tax relief are taken into account for the purpose of the annual allowance.

Tapered annual allowance

The tapered annual allowance is the minimum annual allowance that is available for high earners. If an individual has ‘adjusted income’ over a certain amount the annual allowance begins to reduce by £1 for every £2 that is earned over the threshold.

Adjusted income is defined as an individual’s income plus the value of their pension contributions (including employer contributions).

The budget made two changes in this regard from 6 April 2023:

1. The adjusted income threshold was increased from £240,000 to £260,000; and
2. The tapered annual allowance was increased from £4,000 to £10,000.

Example:

An individual has adjusted income in 2023/24 of £310,000.  Their annual allowance for the year is reduced to £35,000.

Anyone with an adjusted income of £360,000 or more will have an annual allowance of £10,000 and no further tapering will apply.

The tapering reduction does not apply to individuals who have ‘threshold income’ of £200,000 or less. Threshold income is generally calculated as net income less gross personal pension contributions.

Lifetime allowance

Before the Spring 2023 Budget there was a cap on the total amount that could be built up within a retirement fund(s) over the course of a lifetime. This was known as the lifetime allowance. If the allowance was breached a charge would apply on the excess.

This charge was scrapped from 6 April 2023 and the allowance will be abolished completely from April 2024. There is now no limit on the amount that can be saved within a pension fund over the course of a lifetime.

Despite the change to the lifetime allowance, the maximum amount which can be taken from a registered pension as a tax-free lump sum is still frozen at 25% of the former allowance, being £268,275.

Money purchase annual allowance

This allowance is a restriction that only applies to individuals who are already drawing from their pension. It places a cap on the contributions that can be made into a pension, once that fund has been accessed.

The allowance was previously £4,000 and was increased to £10,000 from 6 April 2023.

If contributions are made in excess of the allowance, there will be a clawback of tax relief by way of a charge through Self Assessment.

If you would like to discuss this further, please get in touch and we can review your position. Please contact your usual Wilson Wright contact or Chris Thomas.