Pension tax changes 2023: What you need to know

Changes to the Lifetime Allowance (LTA)

The Lifetime Allowance (LTA) is a limit on the amount of tax efficient pension saving an individual can make in registered pension schemes during their lifetime, without paying an additional tax charge.

The standard LTA for the last 2022/23 tax year was £1.073 million. But as announced in the March Budget, from 6 April 2023 the LTA Tax Charge on pension savings in excess of the LTA was removed.

This means that, if you take your pension benefits and they are in excess of the LTA after this date, they will not be subject to the LTA Tax Charge. They will instead be subject to the same rate of tax as your other pension benefits (i.e. they will be subject to income tax at your marginal rate).

The Chancellor also announced his intention to completely abolish the LTA framework during the 2024/25 tax year, however this is yet to be confirmed.

It is important to note that, whilst the LTA Tax Charge has effectively been removed, the maximum level of tax-free cash (also called the pension commencement lump sum or PCLS) has not been increased. The maximum tax-free cash amount has been frozen for the 2023-24 tax year at £268,275.

Increase to the Annual Allowance (AA)

The Annual Allowance (AA) is the amount by which the value of your pension benefits may increase in any one year without you having to pay a tax charge. This is in addition to any income tax you pay on your pension once it is in payment.

If the value of your pension saving in any one year (including pension savings outside of the Scheme) is in excess of the annual allowance, the excess will be taxed as income.

In the March Budget, The Chancellor announced an increase in the standard AA from £40,000 to £60,000 for the tax year 2023/24.

For high earners, the AA may be lower. If you have a taxable income over £200,000, you will still be subject to the “taper” measure and hence potentially a much lower personal AA. The lowest level of the tapered Annual Allowance (TAA) increased to £10,000 from 6 April 2023 (compared to 2022/23’s lowest level of £4,000) and this will apply for those with taxable incomes (inclusive of employer sponsored pension savings) over £260,000.

This means that you may have the scope to make larger tax efficient pension savings than before. If you had ceased making pension savings, or restricted them, because of the TAA or because your pension savings were at or around the LTA, you may be considering whether to make new pension savings. Furthermore, unused allowance from the previous three tax years can be carried forward.

Increase to the Money Purchase Annual Allowance (MPAA)

The Money Purchase Annual Allowance (MPAA) is a special restriction on the amount you can pay in to your pension and still receive tax relief. MPAA kicks in when you start to access your pension pot for the first time.

MPAA applies in a number of situations if you have “flexibly” withdrawn (for example using income drawdown) any savings from a Defined Contribution (DC) pension scheme from age 55 (or earlier for anyone with specific HMRC protections). This restricts your opportunity to make further DC/money purchase contributions without triggering an AA tax charge.

For the tax year 2023/24, the MPAA increased from £4,000 to £10,000.

This may benefit you if you have flexibly withdrawn DC benefits in the past (for example using income drawdown) but now wish to resume or increase your pension savings from April 2023.

MPAA only applies to contributions that you make to defined contribution pensions. It doesn’t affect defined benefit pension schemes. There are also plenty of arrangements that don’t trigger MPAA:

• You take a tax-free lump sum and buy an annuity that gives you a guaranteed minimum income
• You take a tax-free lump sum from your pension pot and set up a drawdown scheme but don’t yet take any income from the drawdown scheme
• You cash in pension pots with a value of less than £10,000.