Search
Close this search box.
Search
Close this search box.

The Tax Implications of the Pension Annual Allowance Increase in the UK?

UK Pension Annual Allowance Increase Taxes

Listen to the Podcast:

As part of his “back to work budget“, on the 15th of March 2023, chancellor Jeremy Hunt announced that the pensions annual allowance would be increased from the beginning of the new tax year on the 6th of April. The aim is to encourage people to remain longer in the workplace.

What the Pensions Annual Allowance Does?

The pensions annual allowance dictates the limit regarding how much you can invest in your pensions every tax year while still allowing you to benefit from tax relief. It covers any contributions you, your employer, and anyone else might make. 

In the spring budget announcement, Mr Hunt confirmed that the current pension annual allowance of £40,000 per tax year will be raised by £20,000 to £60,000, with effect from the 6th of April 2023. 

Tax Implications of the Increase

There are tax implication for people that use the pension annual allowance to invest for their retirement. If you were to breach the annual allowance, you will be faced with a charge calculated in order to remove any upfront tax relief that your contribution would have merited. What that means is that if you are a basic rate taxpayer, that charge will be based on 20%, 40% if you’re a higher rate taxpayer, and 45% if you’re an additional rate payer.

How to Calculate Your Annual Allowance?

All contributions that you and your employer make to your pension pots are measured against your annual allowance. But don’t forget to take tax relief into account. Tax relief at the 20% rate in effect increases each contribution by 25%. To check if you’ve incurred a tax liability, you can use the calculator.

If you’re someone with a defined benefit pension, the calculation is rather more complex given that there isn’t a defined size of pension pot. The best way to establish where you stand is to ask your pension provider or a financial advisor.

Pensions Annual Allowance (and MPAA) Timeline

The pensions annual allowance was first introduced in 2006. The table below shows how it has changed over the years.

Tax Year

Annual Allowance

Money Purchase Annual Allowance

2023-2024

£60,000

£10,000

2017-2022

£40,000

£4,000

2015-2017 

£40,000

£10,000

2014-2015

£40,000

2011- 2014 

£50,000

2010-2011

£255,000

2009-2010

£245,000

2008-2009

£235,000

2007-2008

£225,000

2006-2007

£215,000

 

The money purchase annual allowance (MPAA) came into being in 2015. It is usually triggered when taking income from a flexi-access drawdown pension or by withdrawing a lump sum from a pension lump sum which is uncrystallised. Other actions can trigger it too.

The Tapered Allowance – How it Affects High Earners?

The tapered annual allowance for high earners came into effect on the 6th of April 2016. It limits the amount of tax relief you can claim on your pension contributions by reducing your annual allowance.

Up until now, if you had an adjusted income of over £240,000 per annum and a threshold income above £200,000, your pensions annual allowance was being squeezed. You lost £1 for every £2 you earned over £240,000, down to a minimum of £4,000.

The changes announced in the spring budget see the old tapering allowance change from £40,000 sliding down to £4,000, to £60,000 sliding down to £10,000.

In addition, the adjusted income threshold, which triggers the tapered allowance mechanism, has also been increased, in this instance, by £20,000, from £240,000 to £260,000, from the beginning of the 2023-24 tax year. 

How the Various Increases Benefit Investing for Retirement?

The increase to the annual allowance (AA) benefits the majority of people investing for retirement as it gives them the opportunity to invest more. The existing carry-forward rules allowing you to carry forward any unused annual allowances from the past three years can also be hugely beneficial if they are taken advantage of.

The changes to the MPAA are to be welcomed, albeit they are long overdue. Brought in originally to prevent wealthier individuals from milking tax freedoms by withdrawing large sums of cash to their advantage then recycling it back into their pension pots and benefiting from tax relief – the increase to the MPAA threshold prevents the ordinary saver from the risk of being caught out by a system that was aimed at wealthier system abusers.

The increases to the tapered allowance (TA), together with the abolishment of the lifetime allowance, are the final pieces that slip into place. All in all, if you are investing for retirement, these changes are long overdue and significant. They open the way for boosting everyone’s retirement savings.

Minimising your Tax Liability and Maximising your Retirement Savings

To make sure you minimise any tax liability when saving or investing for your retirement, simply make sure that you stay beneath all of the thresholds (AA, MPAA, TA) but maximise your pension contributions by getting as close to the thresholds as you can. Also, don’t forget you have the option to carry forward for any unused balances of your annual allowances from the past three years.

In terms of maximising your retirement savings, don’t forget you can make use of tax wrappers like investment ISAs. While you will have to be disciplined and avoid taking money out unnecessarily, stocks and shares ISAs not only provide you with CGT-free growth, but they also provide you with tax-free income.

What Might We See in the Future?

Although the Conservative chancellor has abolished the LTA, if the Labour party win the next election, which is widely expected, they have promised to reinstate the existing limit of £1.073 million. 

There is one school of thought that given the financial pressure that the government is under (and this won’t magically disappear under a Labour government) that future budgets might reduce pension contribution tax relief and even some of the pension freedoms, such as the 25% tax-free lump sum. 

But as we now seem to be on the right road with pension progress, following the introduction of workplace pensions, auto-enrolment, and the positive changes Mr Hunt has announced in his spring budget, any future negative changes could slow the trend down. 

However, it could be the case that a Labour government will look to penalise the wealthy and the higher paid, especially in the light of the comments made by shadow chancellor Rachel Reeves who said that the abolishment of the LTA was a “Tory tax cut for the rich,” and she labelled the changes as being  “the wrong priority, at the wrong time, for the wrong people.”


Subscribe to Our Newsletter

Related Articles

Top Trending

Xiaomi ceo proud su7 75000 orders
Xiaomi CEO Proud as SU7 Lock-In Orders Surpass 75,000
mating press
The Origins, Meanings, and Secrets of Mating Press [Expert Analysis]
April 25 Zodiac
April 25 Zodiac: Insights on Love, Relationships, and Career Success
motorbike accident immediate steps
Immediate Steps to Take After a Motorbike Accident
self-control is strength. calmness is mastery. you - tymoff
Self-Control Is Strength, Calmness is Mastery, You — Tymoff

LIFESTYLE

Most Expensive Handbags for Women in the World
Elegance Redefined: 10 Most Expensive Handbags for Women in the World
Gift Ideas for Men
10 Thoughtful and Unique Gift Ideas for Men Who Have Everything
pohela boishakh 2024
Pohela Boishakh: Celebrating Bengali Culture and Heritage Festivities
Korean Beauty Secrets
10 Korean Beauty Secrets for Youthful Energy: Stay Young & Vibrant
Ancient Philosophers Guide to Happiness
Unlocking Happiness: Timeless Lessons from Ancient Philosophers

Entertainment

taylin gallacher
Biography, Life, Relationship and Career of Taylin Gallacher in 2024
Kim Kardashian Response to Taylor Swift
Kim Kardashian's Three-Word Response to Taylor Swift's Diss Track Reignites Feud
Netflix What Jennifer Did AI Controversy
AI Controversy Surrounds Netflix's True Crime Doc 'What Jennifer Did'
Kellie Pickler's Emotional Stage Comeback
Kellie Pickler's Emotional Stage Comeback After Husband's Passing
north koreans animate amazon hbo max shows
North Koreans Reportedly Helped Animate Amazon, HBO Max Shows

GAMING

F95zone
How to Get Started on F95zone and Increase Community Interaction in 2024 [Gamer's Guide]
Haligdrake Talisman
How to Obtain Haligdrake Talisman Locations in Elden Ring [Gamer's Guide]
enjoy4fun
Discover a World of Exciting Gaming in Enjoy4fun [How to Guide]
5 Tips for Signing Up to a Trustly Casino
5 Tips for Signing Up to a Trustly Casino
Online Poker Trends for 2024
Online Poker Trends for 2024

BUSINESS

3.6% Inflation Shortfall in Australia
3.6% Inflation Shortfall in Australia: Rate Cuts on Hold as Prices Remain Hot 
top plastic packaging manufacturer
Which Plastic Packaging Manufacturer Will Be a Good Choice
Analysts Chase Top Delivery Stock
Analysts Scramble to Keep Pace with Leading Delivery Stock
Tesla Hacked
Tesla Disbands New Marketing Team Just Months After Formation: Report
World Richest Families
Power and Wealth: Top 10 World's Richest Families in 2024

TECHNOLOGY

Xiaomi ceo proud su7 75000 orders
Xiaomi CEO Proud as SU7 Lock-In Orders Surpass 75,000
the emergence of india as a global hub for software development
The Emergence of India As a Global Hub for Software Development and IT Services
xiaomi su7 sedan 70000 first month orders
Xiaomi's EV Debut: SU7 Sedan Hits 70K Orders in First Month!
myliberla
What Are the Impact of MyLiberla on Personal Empowerment and Productivity
UiPath Launches Data Centers in Pune and Chennai
UiPath Boosts Presence in India: Launches Data Centers in Pune & Chennai

HEALTH

Can Tonsils Grow Back After Being Removed? - Tymoff
Can Tonsils Grow Back After Being Removed? - Tymoff
impact of emotional trauma on chronic pain
Who is Most Affected by Emotional Trauma-Induced Chronic Pain?
Intermittent Fasting
Unlocking the Power of Intermittent Fasting: Expert Tips Revealed
disease x
Disease X: Scientists Predict Virus Could Spark Next Global Pandemic
A Comprehensive Experience with Dr. Aravind Bhateja
A Comprehensive Experience at Sparsh Hospital in Bangalore with Dr. Aravind Bhateja