Lifetime allowance and annual allowances changes for 2023/24 and from 2024/25
Recent Lifetime allowance and
Annual Allowances changes
The Spring Budget announcement on 15th March 2023 saw the Government introduce significant changes to various aspects of pension law, including the annual allowance, lifetime allowance, and tax-free cash options. These changes aim to reshape the landscape of pension contributions and withdrawals.
In this guide, we break down the key changes, and provide insight into what to expect in the coming tax years.
The Changes from 6th April 2023
Effective from 6th April 2023, the following changes have been implemented:
- Annual Allowance Increase: The annual allowance has risen from £40,000 to £60,000, allowing individuals to contribute more to their pensions while benefiting from tax relief.
- Lifetime Allowance Charge Removal: There will be no lifetime allowance charge in the 2023/24 tax year.
- Money Purchase Annual Allowance (MPAA) Increase: The MPAA has increased from £4,000 to £10,000, enabling those who have accessed their pension savings more flexibility in future contributions.
- Adjusted Income Threshold: The adjusted income for determining the tapered annual allowance has been raised from £240,000 to £260,000. This change affects high earners' annual allowance.
- Taxation on Lifetime Allowance Excess: Taxation of any excess above the lifetime allowance for lump sums, serious ill-health lump sums, defined benefits lump sum death benefits, and uncrystallized funds lump sum death benefits will shift from a 55% charge to being taxed at the individual's marginal income tax rate.
- Protection Cessation Event: Individuals with enhanced or fixed protection before 15 March 2023 will retain their protection even if they experience a "protection cessation event" on or after the 6th April 2023.
- Enhanced Protection Tax-Free Cash: Those with enhanced protection can still receive higher tax-free cash based on their pension fund's value on 5 April 2023.
What Remains Unchanged in
the 2023/24 Tax Year?
Despite these significant alterations, certain aspects of pension rules remain unaltered in the 2023/24 tax year:
- The existing regulations for calculating tax-free cash will stay in place.
- Providers and scheme administrators are still required to perform lifetime allowance checks at benefit crystallisation events.
What Additional Changes can we Anticipate in the 2024/25 Tax Year?
While some changes have been introduced, further alterations are expected in the 2024/25 tax year, as outlined in draft legislation released on 18th July 2023:
- Abolishing the Lifetime Allowance
The lifetime allowance will be abolished, replaced by a lifetime limit of £1,073,100, known as the “lump sum and death benefit allowance.” Lump sums exceeding this limit will be taxed at the individual’s or beneficiaries’ marginal income tax rate.
- Lump Sum Allowance
Within the lifetime limit, there will be a tax-free limit for various lump sums, such as pension commencement lump sums, uncrystallized funds pension lump sums, and more.
- Protection Deadlines
A deadline of 6th April 2025 is proposed for those applying for fixed protection 2016 or individual protection 2016.
What are the Tapered Annual Allowance Changes since
6 April 2023?
Since 6th April 2023, the following changes have been made to the tapered annual allowance:
- Reduced Annual Allowance: Individuals with “adjusted income” exceeding £260,000 annually will experience a reduced annual allowance. The reduction is £1 for every £2 over £260,000, with a maximum reduction of £50,000. Those with adjusted income over £360,000 will have an annual allowance of £10,000.
- Threshold Income Exemption: Individuals with a “threshold income” of no more than £200,000 will not be subject to the tapered annual allowance reduction.
What details are still unclear?
- The changes set for the 2024/25 tax year are currently undergoing consultation, and the final approach may differ from the proposals.
- The specific mechanisms for monitoring lump sums and lump sum death benefits against the new limits are yet to be detailed.
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