Pensions tax changes in Budget 2023
Commenting on today’s Budget, partner Claire Carey said: “Given the impact they seem to be having on those working in crucial public services, rumours about significant changes to the pension tax allowances have been gathering momentum over the last few weeks. In today’s Budget, the Chancellor confirmed much of this conjecture will become a reality from 6 April 2023, with the AA increasing to £60,000. But the big surprise was the LTA, which is set to be abolished altogether from April 2024.”
“Clearly, the Chancellor is trying to avoid pensions tax being a barrier to those over 50 remaining in work. Sweeping away the LTA has a number of knock-on consequences which will need to be worked through, and the devil will lie in the detail of the ultimate legislation. But, given the relative frequency with which the LTA has shifted previously and the complexity of the accompanying protection measures, its removal suggests a significant step towards greater pensions tax simplicity.”
– AA set to rise to £60,000 from 6 April 2023
– The money purchase annual allowance also increasing back up to its previous level of £10,000 from 6 April 2023
– The parameters for the tapered AA will move again, starting at £260,000 (instead of £240,000), with the minimum taper amount likewise on the up to £10k from 6 April 2023
– Finally, the LTA charge will be removed from 6 April 2023, before the LTA is abolished altogether from April 2024 under a future Finance Bill
Background – the shifting pensions tax allowances
A-Day (6 April 2006) introduced one set of rules covering all types of registered pension scheme saving. But pensions tax is anything but simple, with the amount of the annual allowance (AA) and the lifetime allowance (LTA) having shifted several times since.
The standard AA, as it is now known, currently stands at £40,000, having once reached the heady heights of £255,000. In addition, a money purchase AA (currently £4,000) applies where an individual flexibly accesses their DC savings, and a tapered AA applies to higher earners. Under the current taper, for every £2 of adjusted income they earn over £240,000 an individual’s AA is reduced by £1, so that anyone earning £312,000 or more has an AA of just £4,000 a year.
Just as the AA has changed many times since its inception, so has the LTA. Having started at £1.5m at A-Day and reached its pinnacle of £1.8m, it has reduced three times since in 2012 (to £1.5m), in 2014 (£1.25m), and in 2016 (£1m). Each reduction in the LTA has brought with it complicated grandfathering measures, designed to protect members whose pension savings were already at or around the existing (pre-reduction) LTA level.