Several changes to pension tax were introduced on 6 April 2023. There’s a lot to keep track of! We’ve summarised the key developments here. To see how they affect you, you can ask the re:accounts team to review your tax efficiency. Plus, we know an amazing independent financial adviser who can help with all aspects of pensions.
“It’s worth reviewing your pension situation,” explains Emily Bridges of re:accounts in Stevenage. “Pensions traditionally offer tax savings however the new rules may mean that your finances require a slightly different approach to keep you as tax efficient as possible.”
Three Changes to Tax Relief for Pension Savings
1. Annual Allowance
Your annual allowance is the most you can save in your pension pots in a tax year before you have to pay tax. This is £60,000 for the current tax year (increased from £40,000 during 2022/23). If you have more than one pension, this applies across all of your pension pots.
If more than £60,000 is saved in pensions during this tax year, you might be able to carry over any annual allowance you did not use from the previous three tax years. You’ll get a statement from your pension provider telling you if you go above the annual allowance in their scheme. If you’re in more than one pension scheme, ask each pension provider for statements.
When the annual allowance is exceeded with no annual allowance carried over, a charge to income tax, known as the annual allowance charge, arises.
If you have high income, your annual allowance is tapered down so it does not fall below a minimum of £10,000 (previously, £4,000). This applies if:
- your ‘adjusted income’ for the tax year is more than £260,000 (previously £240,000), and
- your ‘threshold income’ for that year is over £200,000.
There are several issues to consider if a tapered annual allowance applies to you. Please contact us if you’d like to know more – we’d love to introduce you to our pensions expert.
2. Annual Earnings Limit
The annual earnings limit determines the earnings threshold for automatic enrolment to an employer’s pension savings. From 6 April 2023, the earnings thresholds are unchanged from the previous tax year:
- Lower level of qualifying earnings: £6,240 pa
- Earnings trigger for automatic enrolment: £10,000pa
- Upper level of qualifying earnings: £50,270pa
3. Lifetime Allowance
The lifetime allowance is the maximum amount you can hold within a pension during your lifetime. The 2022/23 limit was £1,073,100, which capped the total amount of tax-free savings which can be held in an individual’s various pensions.
The lifetime allowance charge was removed on 6 April 2023. The allowance is abolished entirely from April 2024. High earners will have the opportunity to save unlimited funds in pensions. This is intended to incentivise highly skilled workers to remain in the labour market as they won’t incur significant pension tax charges.
As most pension pots are inherited tax-free, they could be used for effective inheritance tax planning. This could be addressed within the full legislation to be released later this year via the introduction of some anti-avoidance rules to address this issue.
“These changes – especially the big increase in the annual allowance – benefit people who are able to increase their pension savings,” explains Emily. “The potential to increase tax efficiency should also be explored so that every opportunity is taken to minimise tax liability.”
To find out how these changes affect you, talk to the re:accounts team. We’re great at cutting through stuffy jargon and love to save you money. Linking our tax expertise with our expert pensions partner’s advice is a winning combination. Don’t miss out!
