Annual Allowance - What’s changing?
In the spring budget, the government announced increases to the annual allowance limit and the income limits (threshold and adjusted income) that you use to work out your tapered annual allowance.
- From 6 April 2023, the revised annual allowance limit will be £60,000.
- The adjusted income limit will rise from £240,000 to £260,000. The Chancellor also increased the minimum reduced annual allowance that you can have under the tapering rules from £4,000 to £10,000.
- For anyone contributing to a separate money purchase scheme (AVC, personal pension, SIPP), the allowance is rising from £4,000 to £10,000, but be aware that these additional contributions do form part of the total £60,000 allowance.
What is the annual allowance?
The annual allowance is the maximum you can save in your pension schemes each year with the benefit of tax relief. For members of a defined benefit scheme like the LGPS, this is not the amount of contributions paid but the growth in your pension in any given tax year. The calculation in simple terms is a comparison of the value of your total LGPS pension at the start and end of the tax year, multiplied by a factor of 16 (plus any automatic lump sum and additional AVC payments).
For 2023 /2024 the annual allowance will be £60,000 for the majority of LGPS members. If you have a high income, your pensions annual allowance may be lower than this and the tapering of the annual allowance is applied depending on your income within the tax year. You will only be subject to the tapered annual allowance as a high earner and for every £2 your adjusted income goes over £260,000, your annual allowance for that year reduces by £1.
More information about the tapered annual allowance can be found at gov.uk: Work out your reduced (tapered) annual allowance
Lifetime allowance (LTA) – What’s changing?
The current lifetime allowance of £1,073,100 is being removed from 6th April 2023 and abolished all together from 6th April 2024, but what does this mean to you?
As scheme administrators, we will continue to calculate the LTA in the 2023/ 2024 tax year and if the LTA exceeds the existing £1,073,100 limit, we will issue a benefit crystallisation statement, but any additional LTA tax charge will effectively disappear.
Where the benefits in excess of the existing lifetime allowance are taken as a lump sum (where an individual would have previously been subject to a 55% tax charge above the LTA) will now be taxed at an individual’s marginal rate.
The maximum amount of tax-free lump sum that you can withdraw from a pension will remain at £268,275 (25% of the current lifetime allowance of £1,073,100) unless you have a valid (enhanced) protection in place before 6th April 2023.
For more information on both the annual allowance and lifetime allowance visit gov.uk: Pension Tax Limits