Take Advantage of New Pension Tax Reforms

Individuals making pension contributions, including higher earners affected by the tapered annual allowance and taxpayers planning retirement savings.

Explains the pension tax reforms introduced from 6 April 2023, including changes to annual pension allowances, the removal of the lifetime allowance and how these affect pension contribution planning.

Pension contributions benefit from tax relief and allowance limits. Understanding the updated thresholds and rules helps ensure contributions remain within the allowable limits while maximising tax-efficient retirement savings.

Increase in the Annual Pension Contribution Allowance

The new pension tax reforms that were announced in the recent Spring Budget took effect from 6 April 2023.

The old £40,000 cap on annual pension contributions has been increased by 50% to £60,000, with effect from 6 April 2023.

Tax relief for contributions to pension schemes is given at a taxpayer’s marginal rate of Income Tax and is subject to the increased underlying limits.

Taxpayers will continue to be able to carry forward unused annual allowances from the last three tax years if they have made pension savings in those years.

Removal of the Lifetime Allowance

The lifetime allowance was the maximum amount of pension and/or lump sum that benefits from tax relief.

The lifetime allowance was removed from 6 April 2023 and will be fully abolished in a future Finance Bill.

Both of these changes are intended to incentivise older employees to continue in work whilst continuing to build additional pension savings.

Changes to the Tapered Annual Allowance

In addition, the adjusted income threshold for the Tapered Annual Allowance increased from £240,000 to £260,000 on 6 April 2023.

Those earning over £260,000 (from 6 April 2023) will see their £60,000 annual allowance tapered.

For every complete £2 income exceeds £260,000 the annual allowance is reduced by £1.

The annual allowance cannot be reduced to less than £10,000 (2022-23: £4,000).

Increase to the Money Purchase Annual Allowance

The Money Purchase Annual Allowance also increased to £10,000 (2022-23: £4,000) from 6 April 2023.

Pension Commencement Lump Sum (PCLS)

The maximum amount that most individuals can claim as a Pension commencement lump sum (PCLS) was historically based on a cap of 25% of the available lifetime allowance.

In the current tax year, there remains a PCLS upper monetary cap of £268,275 (based on 25% of the 2022-23 lifetime allowance).

Any individuals who already had a protected right to take a higher PCLS will continue be able to do so.

Real-World Application

These reforms may affect individuals who are:

• Making large pension contributions close to retirement.
• Higher earners potentially affected by the tapered annual allowance.
• Individuals looking to maximise tax relief on pension savings.
• Taxpayers who may wish to carry forward unused pension allowances from the previous three tax years.

Understanding how these updated limits apply can help ensure pension contributions are structured within the permitted allowances.