Think you’ve seen everything you need to know about the changes to tax and pensions for the financial year? Behind the headlines are some important things you need to consider for your pension planning. And some you may have missed.
The UK government wants Britain to start growing again. As we discussed in a previous post, the key focus from this year’s Spring Budget was how to stem the flow of skilled workers heading for early retirement and coax the recently retired back into the world of work.
Changing the rules on tax thresholds and pension payments are just part of this plan, but some of them are quite complex, and there are ramifications that aren’t immediately obvious. We’ve also focused on a few of the main points below.
1. Lifetime allowance on the way out. Annual allowances going up
Starting with the most high-profile change to pension rules, with two of the key thresholds governing how much you can pay into your pension. The lifetime allowance (LTA) and annual allowance (AA) dictate how much you can accrue before you lose your tax relief, and the government believes setting them too low is a disincentive to staying in work. You can now benefit from more tax relief on the money you pay into your pension. The LTA, previously set at just above £1 million, is now zero, and will be abolished from next April. Meanwhile, the AA has risen from £40,000 to £60,000.
2. Income tax – beware the 60% income trap
Income tax is a hugely important part of pension planning, as what you pay into your pension helps reduce your tax liabilities.
For the current tax year, more people will move up a tax bracket. In England, for 2023/24, the threshold for the additional rate tax band (45% on earnings and 39.35% on dividends) has been lowered to £125,140 (in Scotland, the top rate is slightly higher at 47% on earnings above £125,140).
But be warned – you could actually end up paying more than that upper limit. Between £100,000 and £125,140, you could fall into in the ‘60% income trap’. Between those levels, the £12,570 personal allowance gradually diminishes, reducing by £1 for every £2 of income (beyond £125,140 there is no personal allowance at all). This means that some taxpayers are effectively taxed at a 60% rate of tax.
3. Other allowances are rising too
If you’re on a higher income, the level of tax relief you get from paying into your pension can be affected by ‘tapering’. The higher your level of adjusted income – your salary and earnings outside of tax-efficient accounts such as ISAs – the more your level of pensions annual allowance will gradually reduce.
But there’s good news for some in this area. The government has increased the level where tapering starts, it now only applies to adjusted income over £260,000. In addition, the minimum allowance for tax relief has gone up from £4,000 to £10,000.
Alongside this, the Money Purchase Annual Allowance, which applies to those who have already accessed their pension flexibily, has also increased from £4,000 to £10,000.
4. Pension protections are still available
Before this year, the government had cut the LTA on three previous occasions (2012, 2014, and 2016). Each time it was possible to register for fixed protection if your pension was at risk of exceeding the revised limit.
Even with the LTA on its way out, individuals can still apply for fixed protection to the 2016 level (subject to meeting eligibility criteria).
If you had previously opted out from a pension scheme and have Fixed Protection, it’s worth considering re-joining schemes and use these pension contributions to manage your income tax liabilities. Speak to us about what this means for you.
5. There’s still a limit on withdrawing your pension as a lump sum
The LTA may be abandoned, but there’s still a limit on what you can withdraw as a tax-free lump sum. This is capped at £268,275 (25% of the most recent lifetime allowance). There are some circumstances when you can withdraw above this level tax-free.
6. Can you still carry your pension allowances forward?
There are instances when you can carry forward unused benefits from previous years to ensure you’re as tax efficient as possible. For example, business owners could make use of personal annual allowances they’ve not used in the previous three years – providing that they’ve been part of a registered pension scheme during that time.
However, if you’re planning to make use of unused allowances, it is important to consider the impact of tapering for each year.
If you want to find out more about how AAB Wealth can help you, get in touch today.