Key Pension Reform Changes 2023
Key pension reform changes for 2023 were announced by the UK Government in the Spring budget. The key changes aim to simplify pension tax in order to encourage highly skilled workers to extend their working lives.
Considering making pension contributions or withdrawing your pension? Seek advice from your independent financial advisor first.
Annual allowance (AA)
From 6 April 2023 the annual allowance (AA) is increasing from £40,000 to £60,000.
The AA is the maximum pension savings an individual (up to the age of 75) can make in a tax year and get tax relief without incurring a tax charge.
- If the annual allowance is exceeded the tax charge, in a broad way, is to recoup the tax relief on the excess.
- The amount of tax relief will also depend on the individual’s relevant earnings.
Pension savings include amounts paid by the individual, the employer, or somebody else who pays into the pension and also for certain pension schemes the growth in the fund.
- Any unused annual allowances from the previous three tax years can be carried forward.
Tapered annual allowance
The annual allowance is reduced or tapered for individuals with “adjusted income” of over a certain limit.
- The adjusted income threshold is increasing from £240,000 to £260,000 from 6 April 2023.
Money purchase annual allowance (MPAA)
When an individual starts to withdraw or have flexibly accessed their money purchase pension savings the annual allowance is restricted, ie reducing the amount of pension savings they can make and get tax relief.
- This measure was introduced to prevent the “recycling” of pension payments.
- The MPAA is increasing from £4,000 to £10,000 from 6 April 2023.
Pension savings that exceed an individual’s annual allowance, tapered annual allowance or MPAA are taxed at the individual’s marginal tax rate.
Lifetime pension allowance (LTA)
A key change announced in the Spring Budget was that the lifetime allowance tax charge will be removed from 6 April 2023. This will be completely abolished from 6 April 2024.
Background: The LTA is the maximum amount of pension savings over an individual’s lifetime that will get tax relief.
- The current standard lifetime allowance is £1,073,100.
Prior to 6 April 2023 contributions above the LTA are subject to a tax charge on the excess over the LTA at …
- 55% if taken as a lump sum, or
- 25% if taken as a pension.
Individuals with significant pension savings may have protected LTA which is different to the standard allowance.
- Nobody will have a lifetime allowance charge from 6 April 2023.
Tax Free Lump Sums
Another key pension reform change for 2023:
Generally when an individual is entitled to start taking pension benefits the maximum tax free lump sum is 25% of their LTA.
- This will be capped at £268,275 (25% of £1,073,100 the current standard LTA)
Advice should be sought from your pension advisor when considering withdrawing your pension and the amount of tax free lump sum that can be taken, particularly those individuals with protected lifetime allowances above £1,073,100.
Shaw Austin are a firm of Chartered Accountants based in Chester supporting independent business throughout the UK. We take the headache out of business accounting and taxation by providing our clients with a personal service.
This article includes tax rates and allowances correct on date of publishing – tax rates and allowances can change from year to year. Professional tax advice should always be taken in respect of your personal circumstances. Contact us here.
Published April 2023.