The Spring Budget included a number of valuable breaks and benefits for higher earners, retirees, and savers with large pension pots. But what were the tax changes, and how can you make the most of them?
Lifetime allowance abolished
The pension lifetime allowance (LTA) of £1,073,100, the maximum that can be saved into pensions without incurring extra tax, has been abolished. The 25% or 55% tax charge on amounts exceeding the threshold was removed from 6 April 2023.
This is great news for savers with large pensions who can continue, or resume, payments into their pension pot – and benefit from tax relief on their contributions – without the risk of exceeding the LTA on certain occasions, such as when drawing pension benefits, or at age 75.
The tax-free cash lump sum entitlement will remain at £268,275, which is 25% of the original lifetime allowance. However, savers who benefit from fixed protection can pay into their pension again and won’t be subject to the £268,275 cap, meaning they will benefit from their higher tax-free cash entitlement.
Tip: Discover if and how you could optimise your pensions with Lumin’s Financial Health Check. The review is quick, simple and complimentary, starting with a few questions over a friendly coffee (or tea).
Paying more into your pension
The standard pension annual allowance has risen from £40,000 to £60,000 per year. This 50% increase provides a valuable incentive for savers to pay more into their pension (or to get their company to pay) and benefit from tax relief on their contributions and a larger pension pot (see chart below). The annual allowance includes your personal/employee and employer contributions.
Regular or one-off pension contributions can substantially reduce your taxable income, especially for higher/additional rate taxpayers, or if your earnings are between £100,000 and £125,140 and have an effective marginal income tax rate of 60% (due to the loss of the tax-free personal allowance).
Boost for retirees
Once pension benefits are being drawn, tax relief on contributions is limited to the ‘money purchase annual allowance’. This increased from £4,000 to £10,000 as of 6 April. The increase to the allowance may provide retirees with an incentive to return to the workplace, where they would benefit from mandatory employer pension contributions.
Effective use of pensions and other tax wrappers forms the backbone of a robust financial plan. To find out more call the Lumin team on 03300 564 446, or get in touch via our contact form to book in your complimentary Financial Health Check.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
