If there’s one thing that every Budget has in common, it’s how quickly the financial wood gets obscured by the political trees. Within hours of the announcements, the headlines in the press start to focus our attention on who is winning and who is losing. So, if you feel like you’ve lost sight of whether any of the Budget changes to pension rules might be relevant to you, read on.
The caveat
But first, a caveat – and it is a political one of sorts. Tax rules can change. Not only can governments change their own tax rules – as we’ve just seen – but new governments can change an old government’s tax rules. To labour the point (pun intended), there’s a General Election due by January 2025. So just how long the new rules will last is anyone’s guess. You should bear this in mind if you are thinking of taking action on the back of the changes announced on 16 March.
Changes to the rules: how much you can put into your pension
If you are employed or self-employed (sole trader) and earn less than £260,000 a year
As of 6 April 2023, the maximum you can put into your pension in a tax year and get tax relief will be £60,000 rather than £40,000 – as long as the total amount that you put in yourself is not more than the gross amount that you earn in that year.
If you are employed by your own company – as a director, for example – and earn less than £260,000 a year
As of 6 April 2023, the maximum that you can put into your pension in a tax year and get tax relief will be £60,000 rather than £40,000. If the money goes in as an employer’s contribution, the limit is the same, but the amount won’t necessarily be bound by your gross earnings like it is for individual contributions. You should check with your accountant how much can be viewed as being used “wholly and exclusively” for the purposes of your business.
If you are employed, self-employed or have your own company and earn more than £260,000 a year
For high earners, as of April 2023, the maximum amount you can put into your pension in a tax year and get tax relief will be tapered down to a floor of £10,000 rather than £4,000 (there are some additional calculations around this that will depend on your individual circumstances – we’re happy to talk to you about this if you are affected).
If you have started to take money out of your flexible drawdown pension (other than tax-free cash)
For people already taking their pensions flexibly, as of April 2023, the maximum amount you can put into your pension in a tax year and get tax relief is £10,000 rather than £4,000.
What about the carry forward rules?
No changes were announced to the carry-forward rules, which state that if you use up all of your allowance in any one tax year you can also use left-over allowances from the previous three tax years. The point here is that the allowances from previous tax years will be the amount that was allowed in the relevant year. So, for 2022-23, the maximum allowance is £40,000 – there is no change to that.
Changes to the rules: how much can you build in your pension over your lifetime?
The new rules state that, as of 6 April 2023, no matter how much money you have built up and take out of your pension, the government will not ask for any of the tax relief back. Previously, if your total pension ‘benefits’ went over £1,073,100 (the so-called lifetime allowance), you would get a tax charge on the excess amount (either 55% if you took the money as a lump sum or 25% plus your rate of income tax if you took the money as income).
What about tax-free cash?
Although the tax charge on the lifetime allowance has gone, the maximum amount that you can take as tax-free cash remains at 25% of this allowance – regardless of how much has built up in your pension. In other words, if you have a total pension value of up to £1,073,100, you can take 25% of this as tax-free cash. But if you have over that amount, the maximum tax-free cash you can take is limited to £268,275.
Some people will have protections in place under the old lifetime allowance rules, in which case, these will continue to apply to the tax-free cash.
Let’s talk
If you’re still unsure whether any of this applies to you, we’re just a phone call or an email away. And we’re always happy to talk!
Carole Haswell DipPFS
Financial Planner at Talking Finances
Talking Finances is a trading name of Talking Finances Ltd. Talking Finances Ltd is an appointed representative of Parallel Lines The Advisor Collective Ltd, No.2 Sopwith Court, Slough Road, Datchet, Berks SL3 9AU, which is authorised and regulated by the Financial Conduct Authority. FCA Registration No. 967228
This article represents the personal opinion of Carole Haswell only and does not represent any opinion of Parallel Lines the Advisor Collective Ltd. Financial decisions should not be made on the basis of this article.
- All content is based on my understanding of current legislation, which is subject to change.
- This blog is for general information only and does not constitute advice.
