• 20 March 2023

    Spring Budget 2023: the changes that affect pension allowances

    On 16 March, Jeremy Hunt set out his plans for the UK economy in his latest Budget announcement, which included some major changes to pension allowances. Here’s how those changes could impact your clients’ pension policies.

    Key pension changes from the 2023 Spring Budget:

    • The pension annual allowance will increase from £40,000 to £60,000
    • The money purchase annual allowance will increase from £4,000 to £10,000
    • The tapered annual allowance will be updated 
    • The lifetime allowance will be removed entirely

    How have pension allowances changed?

    Pension annual allowance changes

    The pension annual allowance is the total amount that can be saved into personal pension plans each year before an additional tax charge is payable. This includes payments from clients, their employer and any third party. It was either £40,000 or a client's total earnings – whichever is lower. But it’s now going up to a maximum of £60,000 on 6 April 2023.

    Money purchase annual allowance changes

    If clients access any taxable money from their pension plan, the money purchase annual allowance usually reduces the amount they can save into their plan from £40,000 to £4,000.

    The Chancellor announced that this will go up from £4,000 to £10,000 – making it easier for them to keep working and saving once they’ve taken money from their savings, if they want to. 

    This might be particularly useful for anyone who dipped into their pension plan to help top up their income during the pandemic or while costs are so high. 

    Tapered annual allowance changes

    Clients who are higher earners might have been impacted by the tapered annual allowance. This gradually reduces the amount they can save into their pension plan each tax year depending on their earnings. The allowance wouldn’t reduce to any lower than £4,000. This lower limit will be increased to £10,000 in the new tax year.

    Lifetime allowance changes

    The lifetime allowance is the total amount someone can build up in all their pension savings in their lifetime without facing a tax charge when they come to take them. If the pension savings are worth more, they’d need to pay a tax charge on anything over the allowance – also known as the ‘excess’.

    The lifetime allowance is currently £1,073,100 – and we were told in the 2021 Spring Budget that it would stay there until 2026. The Chancellor however announced that the lifetime allowance will be removed completely, and no one will face a lifetime allowance tax charge from 6 April 2023.

    It’s good news for clients if they were finding themselves close to or already impacted by the previous allowance. It means they can give their pension savings a boost without worrying about paying any extra tax. Or, if they were planning to take their pension money soon but found they were over the previous allowance, they might now avoid up to 55% in tax charges.

    Keep in mind, for most people, the amount they can take as their tax-free entitlement will stay at 25% of the previous lifetime allowance limit of £1,073,100.

    Please remember

    Tax rules and legislation may change, and individual circumstances and where clients live in the UK will have an impact on the tax they pay. 

    The information here is based on our understanding in March 2023 and should not be taken as financial advice.