The abolition of the pensions Lifetime Allowance (LTA) charge for the tax year 2023-24, which was announced in the Spring Budget, releases people to save as much as they like into their schemes.
Previously, anything over the threshold of £1,073,100 was subject to a tax charge of up to 55 per cent.
It is expected, then, that the abolishing of the allowance from April 2024 will be legislated for in a future Finance Bill.
Withdrawal of LTA is necessary change
Many commentators had argued that the LTA change was necessary, because too many highly paid professionals – including NHS consultants and GPs – take early retirement because of adverse pension provisions.
As well as withdrawing the Lifetime Allowance charge and confirming intent to abolish the allowance from legislation altogether, the Chancellor also increased the Annual Allowance from £40,000 to £60,000.
The Annual Allowance is the total amount paid into your pension plans each year, from all sources, before you have to pay additional tax charges.
The Money Purchase Annual Allowance (MPAA) and Tapered Annual Allowance (TAA) was also increased from £4,000 to £10,000, and the Adjusted Income for the TAA from £240,000 to £260,000.
Money Purchase Annual Allowance (MPAA) changes
Previously, if you accessed any taxable money from your pension plan, you would see your allowance reduce from £40,000 to £4,000. The Chancellor has now increased the MPAA to £10,000.
This is the limit on how much people can pay into a defined contribution pension with tax reliefs once they start drawing an income from their retirement plan.
Tapered Annual Allowance (TPA) changes
The Tapered Annual Allowance applies where an individual has a threshold income of £200,000 and adjusted income of £240,000 (adjusted income includes all pension contributions, while threshold income excludes most pension contributions).
Where the TAA applies, an individual’s Annual Allowance is reduced by 50p for every £1 over the adjusted income threshold, down to the minimum level. The minimum level has now been increased to £10,000.
Tax-free lump sum to remain capped
Despite changes across the range of pensions allowances, the cap on the tax-free lump sum that individuals can access at 55 will remain; being 25 per cent of £1,073,100 (£268,275).
It’s worth bearing in mind that whilst the 55 per cent charge has been retracted, benefits received above the tax-free cash level will still be subject to income tax.
Lifetime Allowance and Inheritance Tax
Pensions are usually exempt from Inheritance Tax (IHT), which is levied at 40 per cent, making them a useful means of protecting your wealth.
How can George Hay help?
At George Hay, we place importance on getting to know our clients and understanding what it is that really matters to them in respect of tax planning and protecting what they have worked hard for.
Our proactive approach to working with you means that we will keep you informed about changes to legislation and alert you to opportunities to minimise your tax bill.
Our team of trusted tax advisers, operating across Cambridgeshire, Bedfordshire and Hertfordshire, can advise you on pension tax liabilities, IHT planning and planning for retirement.
To discuss any personal tax matters with one of our experts, contact us today.