The following is a brief summary, together with comments on the potential implications for employers who may need to revisit urgently the structure of their employee benefits.
Annual Allowance
The Annual Allowance is the maximum amount which can be paid with tax relief across different pension ‘pots’ during a single tax year.
This is currently £40,000 per annum but will be increasing to £60,000 per annum from April 2023.
Potential implications
For most employees, the combined level of employer/employee pension funding is unlikely to breach the new Annual Allowance. However, for higher earners or those who may be increasing contributions through lump sum payments such as a bonus waiver, the ability to have £60,000 per annum paid in a tax efficient way gives further scope for pension saving.
It is assumed that the ability to ‘carry-forward’ unused allowances from three previous tax years is to be retained.
Tapering of the Annual Allowance
In an effort to limit pension tax relief for high earners, the Government had introduced rules which reduced the Annual Allowance for high earners.
The current restrictions start to apply once an individual’s ‘adjusted income’ (all taxable income plus pension contributions) exceeds £240,000. The Annual Allowance is reduced on a tapering basis so that an individual whose ‘adjusted income’ is £312,000 or more is left with just £4,000 as their personal Annual Allowance.
The new rules will see the taper introduced for those with an ‘adjusted income’ of £260,000 and above. With the increase in the Annual Allowance (see above) to £60,000 per annum, the tapering will mean that those with ‘adjusted income’ of £360,000 or more will have a £10,000 personal Annual Allowance.
Potential implications
Some employers offer cash in place of part of, or all of the employer pension contributions. The change to the tapering rules may result in employees wishing to amend the balance of cash and pension, particularly in light of the removal of the Lifetime Allowance (see below).
Money Purchase Annual Allowance (MPAA)
The MPAA was introduced to prevent individuals aged 55 and over from drawing their pension funds ‘flexibly’, for example, by using the encashment option and ‘recycling’ funds back into pensions. It does this by imposing a reduced Annual Allowance of just £4,000 per annum.
The Budget has announced an increase to this limit of £10,000 per annum.
Potential implications
Those who may have inadvertently triggered the MPAA (for example, by encashing a small legacy pension plan) might now be able to restore, or increase the level of pension savings to previous levels.
Lifetime Allowance
The Lifetime Allowance is the maximum pension saving that can be built up in a tax efficient way across all pension ‘pots’ over an individual’s lifetime.
The Lifetime Allowance will be removed as from April 2023 and abolished in a future Finance Bill.
Potential implications
There are numerous implications of this decision:
- For pensions, we may see individuals wish to resume pension funding, to benefit from the advantages of tax relief. Furthermore, pension funding enables money to be removed from an individual’s estate for Inheritance Tax (IHT) purposes, so this will be relevant for those with a known (significant) IHT liability.
The removal of the Lifetime Allowance may be particularly relevant for employees who ceased pension funding due to them having applied for ‘Protection’, for example those people who applied to HMRC to retain a higher personal Lifetime Allowance, either when the Lifetime Allowance was introduced in 2006 or subsequently when the Lifetime Allowance was reduced in 2012, 2014 and 2016.
Employers who have previously excluded those with ‘Protection’ from their three yearly re-enrolment duties might now have to include them.
In the event of death, lump sum benefits from employers’ Registered Group Life schemes are included in the value of ‘pension’ benefits and assessed against the Lifetime Allowance. Some employers have put in place Excepted Group Life schemes (and individual Relevant Life Policies) to deal with the potential tax charges on breaching the Lifetime Allowance. This issue is particularly relevant for those individuals who had ceased pension funding due to them holding ‘Protection’.
Employers may wish to revisit their Group Life arrangements and procedures in light of the removal of the Lifetime Allowance.
Tax-free cash (Pension Commencement Lump Sum)
Seemingly, the ‘beginning of the end’ of the 25% tax-free cash sum (Pension Commencement Lump Sum) has also been announced. Those without ‘Protections’ will have the maximum tax-free cash limited to 25% of the current Lifetime Allowance - £268,275.
Additional point
In their initial responses to the Budget, Labour have indicated that they would reverse the removal of the Lifetime Allowance. It is possible that they would offer some form of protection for those who had restarted pension contributions (as was the case when the Lifetime Allowance was introduced in 2006) but this is clearly subject to future decisions.
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