Government announces pension tax changes
On 15 March 2023, the Chancellor presented his Spring Budget to Parliament announcing substantial changes to pension tax rules from 6 April 2023.
One of the most significant changes was regarding the lifetime allowance. The lifetime allowance is the amount you can have in pension savings without having to pay a tax charge on the excess. The limit had been frozen at £1,073,100 since 6 April 2020. However, the government has now announced that the tax charge will be removed entirely. The government hopes removal of the lifetime allowance will encourage people to remain in work longer, particularly experienced doctors who have been retiring from the profession in high numbers since the pandemic.
Despite the removal of the lifetime allowance, the government still intends to limit the Pension Commencement Lump sum (PCLS). This is the maximum you can take as tax-free cash at retirement. The current rules state that you can take up to 25% of your pension pot as a tax-free lump sum provided that it doesn’t exceed 25% of the lifetime allowance. This means the most you can take as tax-free cash when you release your LGPS pension is £268,275. The government intends to maintain this limit and freeze the PCLS at this rate.
The Chancellor also announced key changes to annual allowance tax rules including:
- Increasing the annual allowance from £40,000 to £60,000
- Increasing the money purchase annual allowance from £4,000 to £10,000
- Increasing the tapered annual allowance from £4,000 to £10,000 and raising the adjusted income from which it applies to £260,000
The annual allowance is the amount your pension benefits can increase in a given ‘pension input period’ without incurring a tax charge. More information can be found on our annual allowance webpage.
We await further guidance from the government about how the new measures will work and will update our tax controls on pensions webpages once this is received.