At the March 2023 Budget, Chancellor Jeremy Hunt announced some major changes to the amount of tax relief you can claim on pension contributions.
Here, we look at what the changes mean in practice and consider claims by opponents that these measures represent little more than a tax giveaway for a wealthy few.
Why have these pension changes been made?
The Government has been concerned that some older workers are being disincentivised from working due to the tax levied on pension contributions beyond the current thresholds.
This appears to be a particular problem amongst senior clinicians in the NHS.
According to the Treasury:
“This measure supports the government’s efforts to encourage inactive individuals to return to work, in particular those aged 50 and above, and it removes incentives to reduce hours or leave the labour market due to pension tax limits.”
As a result, at this week’s Budget, Jeremy Hunt announced major changes to the limits of tax relief on pension contributions. The changes will take effect from 6th April 2023.
The OBR expects that the changes will “…increase employment by around 15,000 in 2027 to 2028.”
You can read the full description of these measures in the Government’s Policy Paper, released on 15th March.
What changes have been made?
Lifetime Allowance (LTA) to be removed from April 2023
The amount you can invest in your personal pensions is currently subject to a Lifetime Allowance of £1,073,100. You cannot claim tax relief on contributions made beyond this threshold.
This Allowance will be removed from April 2023, and abolished from April 2024.
Annual Allowance (AA) to be raised from £40,000 to £60,000
The amount you can invest in your personal pension and claim tax relief has been increased by 50% from April 2023.
Interestingly, the AA was £255,000 in 2010/11 before falling to £50,000 and then to £40,000 since 2014/15.
Tapered Annual Allowance threshold increased
The income level at which AA relief becomes tapered rises from £240,000 to £260,000.
Currently, if your ‘adjusted income’ is £240,000 or more, the value of your AA is reduced by £1 for every £2 earned over that threshold – although the value of the AA can’t fall below £4,000.
Under the new rules, the tapered AA won’t kick in before your ‘adjusted income’ hits £260,000. And the value of the AA in such cases cannot fall below £10,000 rather than £4,000.
Money Purchase Annual Allowance (MPAA) increases to £10,000
Once you have accessed your defined contribution pension savings, the amount you can continue to invest into your pension and attract tax relief is limited to a mere £4,000. This threshold will rise to £10,000 from April 2023.
Pension Commencement 25% Lump Sum (PCLS) option to be capped
From 6th April, in the vast majority of cases, the amount of pension you can withdraw from your pot as a cash lump sum will be capped at 25% at the pre-change Lifetime Allowance, i.e. 25% of £1,073,100 = £268,275.
Why have these pension changes been criticised?
According to the Budget documents, the combined cost of these measures will be around £1bn per year. To many, this seems like a tax giveaway to a privileged few, whilst the country is tackling a pronounced cost of living crisis.
David Brooks, head of policy at Broadstone, told The Guardian that these measures amounted to “a huge tax giveaway to the wealthiest people in the country”.
Shadow chancellor Rachel Reeves called the changes a “free-for-all for the wealthy few”, and said that Labour would force a vote against the pension changes in the Commons.
Reeves said that if her party wins the next election, they would reinstate the LA and create a targeted scheme targeting NHS doctors.
Always talk to a professional adviser if you have any questions about pensions and tax relief on pension contributions.
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