The Chancellor announced the following measures on Pensions in his Spring 2023 Budget.
It is proposed that from April 2023:
- The lifetime allowance charge is abolished.
- The maximum pension tax-free lump sum is frozen at 25% of the current Lifetime Allowance (LTA) limit.
- The annual allowance is increased to £60,000 per year with increases to the tapered annual allowance and adjusted income level.
In addition, there will be changes to the taxation of Lifetime Allowance excess lump sums, serious ill-health lump sum (SIHLS), defined benefits lump sum death benefit (DBLSDB), and uncrystallised funds lump sum death benefits (UFLSDB), which are currently subject to a 55% tax charge above the LTA, to ensure that they are instead taxed at an individual’s marginal tax rate.
The proposed measures mean that from April 2023 no taxpayer should face a Lifetime Allowance charge on their pension pot.
The Lifetime Allowance (LTA) is the maximum amount of tax relievable pension savings an individual can hold in their lifetime. It has been fixed at £1,073,100 since April 2020.
Following the proposed abolition of the LTA limit for those without protection, the pension tax-free lump sum will be limited to 25% of the current LTA limit or £268,275.
- The exception to this is where a taxpayer has LTA or Pension Commencement Lump Sum (PCSL) protection applied for before 15 March 2023.
- This had to be applied for and served to protect individuals who already had substantial pension pots when the LTA was first introduced. With the abolition of the LTA limit, these protections will now only take effect in respect of the tax-free lump sum.
The annual allowance is the maximum amount that an individual can save into their pension in a tax year with tax relief without incurring a tax charge.
- The annual allowance is increased from £40,000 to £60,000 per year.
- The tapered annual allowance for taxpayers with income above a certain level (the adjusted income level) and money purchase annual allowance are increased from £4,000 to £10,000.
- The adjusted income level for the tapered allowance is increased from £240,000 to £260,000.
Other pensions measures
- New legislation is to be introduced to make it clear, as was always intended, that payments made from a collective money purchase pension scheme in the process of being wound up are treated as authorised pension payments. This will take effect from the date of Royal Assent of Spring Finance Bill 2023.
- Previously announced measure placing a duty on HMRC to make top-up payments to individuals who save into an occupational pension under net pay arrangements, if their total taxable income is below the personal allowance with effect from April 2024.
- This rectifies a difference in treatment between Relief at Source (RAS) pensions and Net Pay arrangements which caused certain employees in occupational net pay schemes to receive less take-home pay than those in RAS schemes.
- Draft legislation will be published for consultation later this year to enable the digitalisation of the current paper processes for relief at source which should assist scheme administrators and reduce errors.
Useful guides on this topic
Budget 2023: At a glance
Freeview summary of the measures announced in the Budget 2023.
Policy paper: Pensions relief relating to net pay arrangements