Spring Budget 2023 Series: Pension Lifetime Allowance Abolished
This blog is from our Spring Budget 2023 Series, breaking down the information you should know as a business owner. You can find more of this series here.
The Chancellor recently unveiled his ‘back to work’ tax measures in the Spring Budget, focused on restoring market confidence, easing some of the strain on businesses and the public, growing the economy and rejecting the “narrative of decline”.
“In the autumn we took difficult decisions to deliver stability and sound money. Today, we deliver the next part of our plan: a Budget for growth. Not just growth from emerging out of a downturn. But long-term, sustainable, healthy growth,” said Hunt.
Changes included lifting the cap on tax-free pension contributions, the 100% ‘full expensing’ tax relief and freezing fuel duty, however the corporation tax hike was held firm.
Read more from the budget announcements here.
What is happening to pensions?
Chancellor Jeremy Hunt announced the pensions lifetime allowance will be abolished.
What is the lifetime allowance?
This is the limit on how much you can build up in pension benefits over your lifetime, whilst still enjoying the full tax benefits.
The figure is currently £1,073,100, meaning you would be charged tax on any amount saved over that. This will now be removed from April 2023, before being completely abolished from April 2024.
The allowance was first introduced in 2006, at a limit of £2 million, however this has been reduced by numerous Chancellors since, to its current limit.
This move is one of several attempts to encourage older, high-skilled workers to stay within the workforce by reducing the risk of incurring significant pension charges. Jeremy Hunt said: “Unpredictable pensions tax charges are making senior clinicians leave the NHS just when they are needed most. The issue goes wider than doctors – no one should be stopped from working which is why I am going to abolish the lifetime allowance.”
Stevie Heafford, tax partner at HW Fisher said: “These are long and overdue reforms
to make the UK pension system more attractive and simple. Higher paid workers who might have felt forced into early retirement or reducing hours to avoid higher tax rates are now incentivised to continue working and contributing to the UK’s economy.”
The removal of this lifetime allowance is estimated to cost the Treasury £2.75 billion over the next five years.
Faye Church, chartered financial planner at Investec Wealth & Investment, said: “This is a welcome lifeline not only for those that wish to save more for a tax-efficient retirement, but also those that already find themselves over the lifetime allowance.
Most recent HMRC data shows a record 8,510 people broke the lifetime allowance and paid a total of £342m in charges because of this. For the medical profession, the low lifetime allowance has been a driver for some to retire early as they fear being penalised for accruing large pension entitlements.
Many savers in defined contributions schemes have unwittingly fallen foul of this allowance due to healthy investment performance, through no fault of their own. In 2016 the FTSE100 stood at around 6,000, whereas today we see it around 7,800; an increase of 30%. Over the same period the lifetime allowance has been fixed at just over £1m, making pension pots close to, or at the lifetime allowance an easy tax target.
This creates a lot of opportunity for those wishing to maximise their pension pot, but unable to due to either the restrictions on the amount they are able to contribute or having too much already saved within their pension.”
Jeremy Hunt also announced they will be increasing the annual allowance for pension contributions from £40,000 to £60,000.
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