Pension tax limits

This measure supports the government’s efforts to encourage inactive individuals to return to work, in particular those aged 50 and above, and it removes incentives to reduce hours or leave the labour market due to pension tax limits. Legislation will be introduced in Spring Finance Bill 2023 and will have effect from 6 April 2023. This will:

•          Increase the Annual Allowance from £40,000 to £60,000.

•          Increase the Money Purchase Annual Allowance from £4,000 to £10,000.

•          Increase the income level for the tapered Annual Allowance from £240,000 to £260,000.

•          Ensure that nobody will face a Lifetime Allowance charge.

•          Limit the maximum an individual can claim as a Pension Commencement Lump Sum to 25% of the current Lifetime Allowance (£268,275), except where previous protections apply.

•          Change the taxation of the Lifetime Allowance excess lump sum, serious ill-health lump sum, defined benefits lump sum death benefit and uncrystallised funds lump sum death benefit, where they are currently subject to a 55% tax charge above the Lifetime Allowance, to taxation at an individual’s marginal rate.

Legislation will be introduced in a future Finance Bill to remove the Lifetime Allowance from pensions tax legislation.

 Comment

The government states that evidence suggests recent increases in inactivity have been driven primarily by those aged 50-64, and self-reported retirement has been the main driver for these individuals to leave the labour market. This measure supports individuals’ ability to build up retirement savings and so improves the financial incentive of work whilst continuing to balance the cost of pensions tax relief.