The UK Spring Budget 2023 brought about several changes to pension legislation that may affect your clients. While these announcements were aimed at addressing the UK’s productivity issues and helping economic growth, by encouraging high earning professionals to remain in or return to work (and thus continuing pension contributions), the impact of these changes reaches much further.
As an accountant, while it may not be your specific expertise, it is important to be aware of these changes and how they may impact your clients, especially those who are business owners and high-net-worth individuals.
The LTA change in detail
One of the key changes announced in the budget was the reduction of the Lifetime Allowance (LTA) charge to 0% from 6 April 2023. The LTA is the maximum amount of pension savings that an individual can accumulate across all their pension pots, without potentially facing a tax charge.
Prior to the changes announced in the Spring Budget 2023, any pension savings that exceeded the LTA would be subject to a tax charge at either the point of accessing the exceeding amount, at age 75, or on death (if before age 75).
However, with the LTA charge reducing to 0% from 6 April 2023 and the proposed abolition of the LTA altogether (likely from April 2024), individuals may no longer have to be concerned with the potential of this tax charge.
That said, there are potential income tax charges for certain lump sum payments taken over the available lifetime allowance that will still need to be considered.
The above may seem fairly straightforward, but there are careful considerations that need to be made for individuals’ entitlement to their tax-free cash. As a result of this change, the maximum amount that a member can take as a pension commencement lump sum (PCLS) will be frozen at £268,275 — 25% of the current standard LTA of £1,073,100.
Members with a protected right to a higher PCLS will continue to be able to access this right. For example, if an individual had previously applied for and received a version of LTA protection (fixed protection or individual protection for example) prior to 15 March 2023, they would still be able to take a PCLS based on their protected LTA, provided that protection was still held at 6 April 2023.
A key benefit is that where, previously, having LTA protection in place meant you could no longer contribute to your pension scheme without having the protection revoked (and therefore becoming potentially liable to a tax charge), individuals can begin to contribute again should they be in a position to do so – without penalty.
Importantly though, PCLS entitlement will remain capped as described above, even when making further contributions, unless an individual is yet to reach this cap in which case contributions will still increase tax-free cash entitlement
Case study
A client’s pre-budget scenario
- Pension pot: £1.7 million
- LTA protection: Fixed 2014 (LTA = £1.5 million)
- Tax-free cash: £325,000 (25% of fixed LTA, not pension value)
- Potential tax charge on excess: £50,000 (if taken as income) or £110,000 (if taken as lump sum)
- Further contributions allowed: No, would revoke protection and drop LTA to £1,073,100 resulting in even greater LTA tax charges
A client’s post-budget scenario
- Pension pot: £1.7 million
- LTA protection: Fixed 2014 (LTA = £1.5 million)
- Tax-free cash: £325,000 (25% of fixed LTA)
- Potential tax charge: 0%, however income tax charges may apply on certain lump sum payments.
- Further contributions allowed: Yes, would not revoke protection. T tax-free cash entitlement remains at 25% of fixed LTA.
Additional pension scheme changes
In addition to the changes to the LTA, there were also increases announced for the annual allowance, money purchase annual allowance and tapered annual allowance.
From 6 April 2023, the annual allowance for tax relief on pension savings in a registered pension scheme will increase from £40,000 to £60,000 gross per year. This increase means that individuals will be able to save more into their pension each year while still receiving tax relief on their contributions.
The money purchase annual allowance will increase from £4,000 to £10,000. The money purchase annual allowance is a limit on the amount of contributions that can be made to a defined contribution pension scheme once an individual has started accessing their pension savings flexibly.
The minimum tapered annual allowance, for those with annual net relevant earnings over £360,000 has also increased from £4,000 to £10,000.
From April 2023, the UK corporation tax rate also increased from 19% to 25% for certain businesses.
With these changes in mind, let’s consider an example of how an increase in annual allowance could result in additional corporation tax savings for a business owner.
Jane is a business owner and, prior to April 2023, Jane could make an employer contribution of up to £40,000 into her pension each year and receive corporation tax relief on this contribution at a rate of 19% (£7,600).
Following the budget, Jane could make an employer contribution of up to £60,000 into her pension each year and may receive corporation tax relief on this contribution at a rate of 25% (£15,000). That is an additional £7,400 potentially saved in corporation tax and a further £20,000 added to her pension pot.
What to do now
The Spring Budget 2023 brought about several changes to pension legislation and corporation tax rates that should be a topic of conversation with your clients. As always, it is recommended that individuals seek professional advice when making decisions about their pension savings and tax planning.
It is important to note that while these changes provide some relief for individuals who may have been concerned about exceeding the LTA or facing other tax charges on their pension savings, it is always possible that future legislation could change.
As such, it is recommended that individuals continue to monitor any changes to pension legislation and seek professional advice when making decisions about their pension savings.
Henry Allen, Wealth Management Consultant, Mattioli Woods plc
