As a new tax year approaches, it is important to ensure you are in the best financial position to help protect and grow your future wealth.
Our Bitesize Tax Planning provides you with details of the key allowances and reliefs available to you. The tax planning tips are available in easy to consider sections.
This article looks at Changes To The Lifetime Allowance.
Changes to the Lifetime Allowance
In the Budget on 15 March 2023, the Government announced changes to the lifetime allowance (LTA) and tax-free cash. The changes are designed to alleviate the impact of strict pension rules, which are believed by Mr Hunt (The Chancellor of the Exchequer) to have had a negative impact on the country’s labour market.
Exceeding the allowance
As of 6 April 2023, the LTA charge for registered pension schemes has been completely removed, with total abolition set for 6 April 2024.
The LTA is the maximum amount of savings an individual can make in a registered pension scheme without incurring a tax penalty. The standard LTA for the 2022/23 tax year was set at £1,073,100, which meant those with pensions exceeding this amount would face a tax charge.
However, with the abolition of the LTA charge, individuals can now contribute as much as they like to their pension schemes without fear of being penalised for exceeding the allowance.
This is particularly good news for those with pensions of significant value, as they will no longer be forced to limit their contributions to avoid a tax charge.
If you paused pension contributions because you were concerned you might breach the LTA, you may decide you want to make further tax-efficient additions to your pot. It is also worth noting that the government tax relief on pension contributions will still be available, which means individuals can continue to benefit from this incentive.
Tax-free lump sum
Additionally, under the previous pension rules, an individual could withdraw up to 25% of their pension savings as a tax-free lump sum, but that has now changed. The tax-free lump sum that can be normally drawn at age 55 (rising to 57 from 6 April 2028) is now capped at £268,275, and it is expected that another cap will be set in 2024 once the LTA is fully abolished.
This means that those who have saved a large amount in their pension may not be able to withdraw as much as they had planned. To ensure that your retirement plans are not affected by these changes, it is essential to obtain professional financial advice and discuss what is the best course of action for your situation.
UK’S pension system
The removal of the LTA marks a significant change to the UK’s pension system, and it remains to be seen how this will impact pension savings and retirement planning in the years to come.
The tax-relievable annual pension contribution limit has also increased from £40,000 to £60,000, which is good news for most people. The annual allowance might be lower for those who have flexibly accessed their pension pot and for high earners.
Attractive investment option
Pensions have always been an attractive investment option with tax-relievable contributions, tax-free returns, and usually no Inheritance Tax. The removal of the LTA tax regime and the opportunity to rebuild pension benefits with an increased allowance are excellent news for many pension savers.
More information on the LTA can be found here: https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance
If you would like to discuss anything mentioned in this article, please contact us.
Download our Tax Year End Checklist to assist with your tax planning below.
See the other topics in our Bitesize Tax Planning series:
Personal Reliefs
- Check Your Tax Code
- Personal Allowances
- Savings & Investments
- Dividend Allowance
Planning for Retirement
Research & Development Tax Reliefs
Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.
The Financial Conduct Authority (FCA) does not regulate tax advice, estate planning, trusts or will writing.
The content in this article is for your general information and use only and is not intended to address your particular requirements. Articles should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice.
Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.
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