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Changes to Pension Allowances

Despite a relatively "tame" budget statement in March, there was some surprise around the announcements concerning pensions centred around the abolition of the lifetime allowance and changes to rules on pension drawdown and the annual allowance

The lifetime allowance is one of three controls on tax relief for pension savings, the others being the annual earnings limit and the lifetime allowance. However following the budget the lifetime allowance is to be abolished, effective 2024/25.

The annual allowance limits the amount of tax-relievable inputs an individual may make in any one tax year to one or more registered pension schemes of which the individual is a member.

When the annual allowance is exceeded (technically, when an individual who is a member of one or more registered pension schemes has a non-zero ‘chargeable amount’), a charge to income tax, known as the annual allowance charge, arises. The amount of the annual allowance for the year 2023–24 has been increased to £60,000 from £40,000.

However, in the case of a high-income individual (Adjusted income of over £260,000), the annual allowance is tapered down so it does not fall below a minimum of £10,000 (previously, £4,000). Carry-forward of the annual allowance Where the annual allowance for a tax year exceeds the pension input amount for that year, a limited form of carry-forward is available.

So if in a tax year an individual has ‘unused annual allowance’ available, the individual’s annual allowance for that year will be increased by the amount of that unused annual allowance.

An individual has ‘unused annual allowance’ if

• in the immediately preceding tax year (Year −1), the individual’s annual allowance (ignoring any amounts brought forward under these rules) was greater than the individual’s total pension input amount; and/or

• in the two years immediately preceding Year −1 (Years −2 and −3) the individual’s annual allowance for one or both of those years (ignoring any amounts brought forward under these rules) exceeded the individual’s total pension input amount for either or both of those years and that excess or those excesses are not ‘used up’ (ie, already applied under these rules to increase the annual allowance in a following year).

An amount of annual allowance is ‘unused’ to the extent that, ignoring the effect of any carry-forward, it exceeds the pension input amount for that year and, where that excess arises in Year −2 or Year −3, that excess has not been ‘used up’.

An excess is ‘used up’ if there is an excess of pension input amount for an ‘intervening year’ (ie, one between the year in which the excess arose and the current year) and that excess has been used under these provisions to reduce an annual allowance charge for that intervening year.

In any year, unused annual allowance brought forward is used up on a ‘first-in, first-out basis’, ie, the allowance for earlier years is used in priority to that for later years. Lifetime allowance The lifetime allowance charge will be removed from April 2023 before the allowance is abolished entirely from April 2024.

The current limit is £1,073,100, which caps the total amount of tax-free savings which can be held in an individual’s various pensions. Conclusion There is a clear movement by the government to encourage pension savings and increasing numbers of clients are seeking ways in which they can save for their futures both effectively and efficiently. We work closely with pensions advisors who can help with specific products, however we will always be on hand to discuss the tax benefits or implications of a particular scheme for anyone looking for clarification.

Source Article :Accountancy Daily March 27


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