Pensions and investments

Abolition of the lifetime allowance (LTA) and increase in the annual allowance

The LTA was introduced in 2006 and is the maximum amount of tax-privileged pension savings that may be built up in a registered pensions scheme. In broad terms, when benefits come into payment their value is tested against the LTA, and any excess is subject to an LTA tax charge. Up to 5 April 2023 (when the change takes effect), the applicable extra tax charge is 55% for lump sums paid in excess of the LTA and 25% for any excess paid as a pension.

From 6 April 2023, the LTA charge will be removed. Legislation will then follow in a future Finance Act to remove the LTA from pensions tax legislation. However, changes will be made to freeze the level of the tax-free Pension Commencement Lump Sum (PCLS). The maximum amount that most individuals can claim as a PCLS is currently the lower of: (a) 25% of the value of their benefits; or (b) 25% of their available LTA at the time this sum is taken. From 6 April 2023, a PCLS upper monetary cap of £268,275 (25% of the current LTA), will apply. However, those individuals who already have a protected right to take a higher PCLS will continue to be able to do so.

Whilst as set out above, the LTA will be abolished, there still remains an annual limit on the amount of tax privileged pension savings that an individual may build up. This is the Annual Allowance. If there is an excess above the Annual Allowance, a tax charge arises. High earners are subject to a Tapered Annual Allowance.

The government has announced that the Annual Allowance will increase from £40,000 to £60,000. The minimum Tapered Annual Allowance will increase from £4,000 to £10,000. In addition, the adjusted income level required for the Tapered Annual Allowance to apply, increases from £240,000 to £260,000.

The Money Purchase Annual Allowance (MPAA) is a reduction to the Annual Allowance that applies to individuals who have flexibly accessed their money purchase pension savings (but still wish to build up more pension savings). The MPAA will increase from £4,000 to £10,000.

As a result of these announcements, it will be very important that employees likely to be affected by the LTA who are on the cusp of crystallising their benefits, defer doing so until 6 April 2023.

Many employers have put in place alternative cash arrangements and excepted group life arrangements for those affected by the various allowances/limits and these will need to be revisited.

Relief relating to Net Pay Arrangements

Under Net Pay Arrangements (NPA), employees’ pension contributions are deducted from gross salary before PAYE/tax is applied. Therefore, employees who are subject to tax obtain full tax relief on their pension contribution at that point. However, employees whose income is below the personal allowance do not receive this tax relief top up to their pension (as they are not subject to tax).

Under Relief at Source (RAS), employee pension contributions are paid net of basic rate tax. The pension provider then reclaims basic rate tax relief from HMRC, regardless of whether an employee is a low earner with income below the personal allowance (and not therefore subject to tax).

From 6 April 2024, the Government will pay a top-up to low earners making contributions to pension schemes using a Net Pay Arrangement. The amount, in relation to a contribution, is an amount equal to income tax relief not already received on the contribution at the relevant rate.

ISAs

The Spring Budget 2023 announced that the adult ISA annual subscription limit for 2023/2024 will remain unchanged at £20,000 and the annual subscription limits for Child Trust Funds and for Junior ISAs for 2023/2024 will remain unchanged at £9,000.

The Spring Budget 2023 also announced that the government will legislate by Statutory Instrument to restrict the eligibility to manage ISA and Child Trust Funds to financial institutions with a UK presence. The change will take effect from April 2024.