The budget contained the dramatic announcement that the lifetime allowance (LTA) was to be abolished and the annual allowance (aa) for tax for pension contributions was to be raised from £40,000 per annum to £60,000.
However the HMRC policy paper reveals more subtle details around the changes including a new limit on the amount of tax free cash someone can tax from their pensions and timing issues around the headline announcements.
2023 changes taking effect from 6 April this year include:
- abolishing the LTA charge
- a new monetary limit on tax free cash of £268.275 (25% of the current LTA)
- Changes to the taxation of, LTA excess lump sums along with serious ill health lump sums, DB death benefit lump sums and uncrystallised funds death lump sums. In each case the current 55% tax charge for elements above the LTA will change to tax at the individuals marginal rate.
There will also be increase to the Money purchase annual allowance (where DC benefits have been drawn) from £4,000 to £10,000 the tapered annual allowance will replicate these levels and the income level for when this might apply is being increased to £260,000.
But note whilst it is expected that the LTA itself will be removed in April 2024 the policy paper only commit to legislation being introduced in a future finance bill (2023 bill?) to remove the LTA.
Impact of the changes - whilst further details on some aspects of the changes are awaited some thoughts on the impact can already be drawn.
Most of these changes have been targeted on NHS retention issues especially for senior individuals whilst the LTA abolition will be welcome by some, the far bigger practical issue was around the AA which even with the changes remains far below the 2012 figure of £255,000, it is likely some issues will persist for NHS employees with this issue.
Both the lump sum restriction and indeed the removal of the LTA could be reversed by any subsequent government and this was an immediate promise by the opposition.
It will take time for the detail regulations to be issued and these will then need to be incorporated into individual scheme rules and or any policies around remuneration.
The original intention of the LTA and AA was to restrict the tax advantages of the richest who prior to the original 2006 changes may have looked to increase the pensions entitlement of any remuneration package to enhance the numerous tax advantages pensions enjoys. These limits have impacted on the attractiveness of pensions for senior earners for the last 16 years. The removal of the LTA could have some unintended consequences due to changes made in 2015, which effectively moved pensions out of the Inheritance tax provisions and provided that if benefits were passed on anyone who inherited the pension they would pay no tax on the pot only on any withdrawals. With the abolition of the LTA this route as a means of passing on inter-generational wealth looks more attractive and will be something the wealth management industry is keen to develop.
It is likely that senior managers and other individuals may want to revisit service agreements and other contracts or terms and conditions over the next 12 months to ensure that there is an ability to best use the changes above when they have come into full effect. For tax reasons this may see more of the remuneration package (especially increased employer contributions) being directed toward pension saving than is the current norm.
Finally in the short term expectation management for those eager to benefit from the LTA abolition will be needed, patience for a little longer, whilst the devilish details are revealed will be the key.