Jeremy Hunt delivered his spring Budget last month (15 March), with a focus on economic growth. In his first major announcement in the role, the chancellor also promised to tackle inflation and reduce public debt.
The key part of Hunt’s plan, though, was a drive to get working-age Brits back into employment.
Millions opted for early retirement during the pandemic and the UK workforce is currently short of experienced workers, with the NHS particularly hit.
With tax-efficient pension saving firmly in the chancellor’s sights, several thresholds changed following a shock announcement on the future of the Lifetime Allowance (LTA).
Keep reading to find out about four key spring Budget announcements and what the changes mean for your retirement.
1. Jeremy Hunt opted to abolish the LTA
The LTA arrived in 2006 and placed a £1.5 million limit on the amount you could withdraw from your pensions during your lifetime without becoming liable for a tax charge. The LTA charge stood at 55% for excess funds you took as a lump sum and 25% if taken as income.
The LTA rose and fell over the years, peaking at £1.8 million in 2010/11. In the proceeding years, it dropped to £1 million and had been due to rise in line with inflation before a spring Budget freeze by then-chancellor Rishi Sunak in 2021.
Despite pre-Budget talk of an increase to the limit, Jeremy Hunt instead opted to abolish the LTA completely.
From the start of the 2023/24 tax year, the LTA charge no longer applies and it will be abolished officially from April 2024.
This effectively removes the limit on the amount that you can save into your pension, but doing this tax-efficiently will still rely on another mechanism, known as the “pension Annual Allowance”.
2. The pension Annual Allowance has increased
The pension contributions you make receive automatic tax relief at the basic rate. This is an additional 20% of “free” money gifted to you by the government as an incentive to save for your future.
Not only that, but as a higher- or additional-rate taxpayer, you can claim an additional 20% or 25% respectively, through your self-assessment tax return.
This tax relief applies up to the Annual Allowance.
Before the spring Budget, the Annual Allowance stood at £40,000. From April 2023, this rose to £60,000.
Maximising your Annual Allowance each year is a great way to make the most of the tax efficiencies your pension offers. You might want to begin budgeting now to ensure you can put aside this extra amount in 2023/24.
If you need any help doing this, please get in touch.
3. The Money Purchase Annual Allowance has risen too
If you are already receiving a pension, you might have triggered the Money Purchase Annual Allowance (MPAA). This applies when you take benefits using certain flexible options that came into force with Pension Freedoms legislation back in 2015.
Before the spring Budget, triggering the MPAA reduced your Annual Allowance to just £4,000.
This was especially important if you were withdrawing from one of your pensions but wanted to continue contributing to another, as it severely limited the tax-efficient contributions you could make.
The MPAA has now risen to £10,000, effectively giving you another £6,000 of potential tax-efficient pension contributions each year. This could be especially important if you are considering phased retirement, or where the MPAA was triggered by accident.
4. The Tapered Annual Allowance for high earners has also increased
The problem of a diminishing workforce, especially among older and experienced workers opting for early retirement, has been a particular problem within the NHS.
Consultants and surgeons, as well as being high earners, also have fluctuating salaries. This combination made it easy for them to fall foul of a complicated piece of pension legislation known as the “Tapered Annual Allowance” (TAA).
The TAA effectively reduces your Annual Allowance by £2 for every £1 your income exceeds a specific “adjusted income” amount. This amount stood at £240,000 but increased to £260,000 from 6 April 2023.
A separate “threshold income” amount determines when the tapering test applies. This is set to remain at its current amount of £200,000.
These changes should lower the number of UK workers affected, but even if the TAA still applies to you, there was good news in the Budget.
Previously, the £2 reduction to your Annual Allowance applied until it reached £4,000. This minimum amount has now been raised (in line with the MPAA) to £10,000.
It is hoped that these changes will persuade more experienced workers to stay at work and contribute to their pensions for longer.
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