Tax limits

There are limitations on the amount of tax-relieved pension savings you can have.

Pension Taxation Changes from 6 April 2023

In the Spring Budget 2023, delivered on 15 March 2023, significant changes to the limits on the tax-relieved pension savings you can have were announced. The information on each of the limits below has been updated to reflect the changes which apply from 6 April 2023. You may also wish to click here and read our news article which summarises the taxation changes, explains how they may affect you and the options available.

Please click on the headings below to find out more about each of the limits.

In the Spring Budget 2023, the Government announced that the Annual Allowance (AA) would be increased from £40,000 to £60,000 with effect from 6 April 2023. The Money Purchase Annual Allowance (MPAA) also increases from £4,000 to £10,000 from 6 April 2023.

The Annual Allowance (AA) is a limit to the total amount of contributions that can be paid to defined contribution (DC) pension schemes and the total amount of benefits that you can build up in defined benefit (DB) pension schemes each year, for tax relief purposes.

From 6th April 2023 the AA is £60,000 although a lower limit of £10,000 may apply if you have cashed out a DC pension under the new pension freedoms introduced in April 2016. You should have been advised by the Scheme paying the pension lump sum to you if this reduced AA (referred to as the Money Purchase Annual Allowance) applies to you going forward. You can read more about the MPAA below and in the DC section of the website by clicking here.

In addition, your Annual Allowance may also be reduced if you have Adjusted Income of over £260,000 (referred to as the Tapered Annual Allowance), but the complicated rules mean those earning less may also be affected. Please see the drop down below for further information on the Tapered Annual Allowance.

The AA applies across all of the schemes you belong to, it’s not a ‘per scheme’ limit and includes all pensions savings that you, your employer, and anyone else make on your behalf. If you exceed the AA in a tax year you will be liable for an Annual Allowance tax charge on the value of the excess. In addition, if you have paid any DC or Additional Voluntary Contribution (AVC) type contributions you won't receive tax relief on those deemed to have exceeded the limit.

You may, however, be able to bring forward any unused allowance from the previous three tax years, to help reduce the AA charge.

HMRC have produced a calculator which you can use to calculate your personal Annual Allowance and see if you have a tax charge to pay. This can be found on their web site at www.tax.service.gov.uk/pension-annual-allowance-calculatorPlease note that as of 21st March 2023 HMRC have not yet updated their calculator to reflect the changes announced in the Spring 2023 Budget.

We will provide you with a Pension Savings Statement if the value of your benefits built up in the ABF Scheme have exceeded the AA over the tax year. We will also send a Pensions Savings Statement to anyone that is subject to the MPAA. Where a tax charge is payable, the statement provides the options available to you to pay this charge.

From 6 April 2023, if your Adjusted Income exceeds £260,000, then your Annual Allowance will be gradually reduced from £60,000 to £10,000 (previously £40,000 to £4,000), with £1 of allowance lost for every £2 of Adjusted Income over £260,000 (in a similar fashion to the reduction of the personal allowance on earnings over £100,000).

Adjusted Income takes into account all taxable earnings but adds in the value of pension savings made during the year.

To calculate Adjusted Income, take your total taxable income (i.e. all income such as salary, bonus, P11D benefits, interest on deposits, dividends, rental income etc.) less any items allowable for tax relief (such as pension contributions, charity donations etc.), and add to this the total value of pension savings in that year i.e. the increase in total value of any DB benefits plus any DC type contributions (including AVCs).

Here are a few simple examples:

Diana has a total taxable income of £350,000. Diana’s total DC contributions in the tax year were £35,000. She pays no AVCs and does not contribute to any pension schemes outside of ABF.  Therefore, Diana’s Adjusted Income is £385,000 i.e. £350,000 + £35,000. Diana’s tapered Annual Allowance is £10,000 i.e. £60,000 - (£385,000 - £260,000) / 2 subject to a minimum of £10,000.

Eileen has a total taxable income of £235,000. Eileen’s total DC contributions in the tax year were £27,500. She pays no AVCs and does not contribute to any pension schemes outside of ABF.  Therefore, Eileen’s Adjusted Income is £262,500 i.e. £235,000 + £27,500. Although Eileen’s taxable income is less than £260,000, her Adjusted Income is in excess of £260,000. So, Eileen has a tapered Annual Allowance of £58,750 i.e. £60,000 - (£262,500 - £260,000) / 2.

As you can see, this definition of Adjusted Income means those with taxable income below £260,000 may be affected if the value of their pension savings takes the total to more than £260,000.

However, only those with ‘Threshold Income’ (another HMRC term that describes taxable income ignoring the increase in value of pension benefits) above £200,000 will be affected. Anyone with ‘Threshold Income’ below £200,000 will be unaffected and will retain their Annual Allowance of £60,000.

Changes to the AA / Tapered AA

The table below summarises the changes to the AA and Tapered AA since the Tapered AA was introduced in 2016:

 

Tax years 2016/17 – 2019/20

Tax years 2020/21 – 2022/23 

Tax years 2023/24 onwards

Standard Annual Allowance

£40,000

£40,000

£60,000

Minimum tapered Annual Allowance

£10,000

£4,000

£10,000

“Threshold Income limit”

£110,000

£200,000

£200,000

“Adjusted Income limit”

£150,000

£240,000

£260,000

Adjusted Income “upper bound” where minimum AA applies

£210,000 or more

£312,000 or more

£360,000 or more

We will provide you with a Pension Savings Statement if the value of your benefits built up in the ABF Scheme have exceeded the AA over the tax year. Where a tax charge is payable, your statement provides the options available to you to pay this charge. If you are subject to the Tapered Annual Allowance you will need to assess your pensions savings against this allowance in order to work out whether you have an AA tax charge. 

In the Spring Budget 2023, the Government announced that the Money Purchase Annual Allowance (MPAA) would be increased from £4,000 to £10,000 with effect from 6 April 2023.

If you have flexibly accessed a Defined Contribution (DC) pension on or after 6 April 2015 you do not get the standard £60,000 Annual Allowance (AA) and instead are subject to the Money Purchase Annual Allowance (MPAA) which is £10,000 from 6 April 2023.

The MPAA only applies to contributions to DC pensions and not Defined Benefit (DB) pension schemes.

However, Additional Voluntary Contributions (AVCs) are classed as DC benefits. As a member of the DB section if you choose to flexibly access these benefits separately to your DB pension; this would trigger the MPAA.

You can read more about when the MPAA is triggered, in the DC section of the website, by clicking here.

In the Spring Budget 2023, the Government announced that the Lifetime Allowance (LTA) will be abolished from 6 April 2023.

Up until 6 April 2023, the LTA is the maximum amount you can take in pension benefits during your lifetime from all pension schemes before a tax charge is incurred. If the LTA is exceeded, you will be subject to the LTA tax charge. It is unlikely for the majority of members that the LTA will be exceeded, therefore no charge would apply.

The LTA was initially set at £1.5m in 2006 and has steadily changed in recent years. From April 2018 it has increased in line with the rate of inflation, as measured by the Consumer Price Index (CPI). The government previously announced that for tax years 2021-2022 to 2025-2026, the LTA would be frozen.

Retirement Date

Lifetime Allowance

6 April 2014 to 5 April 2016

£1.25 million

6 April 2016 to 5 April 2018

£1 million

6 April 2018 to 5 April 2019

£1.03 million

6 April 2019 to 5 April 2020

£1.055 million

6 April 2020 to 5 April 2023

£1.0731 million

From 6 April 2023

No tax charge on pension benefits over the LTA

The Government have confirmed in the Spring Budget 2023 that the tax charge on any pension benefits over the LTA that are taken from 6th April 2023 will not have a tax charge applied. Instead, any benefits that are over the LTA will simply be subject to income tax in the normal way. It is expected that the LTA will be removed from legislation with effect from 6 April 2024. It is possible however, that a future Government may decide to reinstate the legislation.

Up until 6 April 2023, individuals whose pension savings had reached the LTA were able to apply to HMRC to protect their pension savings from incurring a tax charge when the LTA was reduced. If you hold either Enhanced or one of the Fixed Protections, your ability to build up further pension savings was restricted. HMRC has confirmed that provided you applied for your protection before 15 March 2023, any protection already in place will continue to remain valid. From 6 April 2023 you will be able to build up new pension benefits without losing your protection. If you had a right to a higher tax free lump sum this will continue to apply. If you hold Primary Protection or one of the Individual Protections, you are already able to make ongoing pension savings without affecting your protection, and this will continue alongside any rights to a higher tax- free cash lump sum.

The detail of how taxation will apply to any benefits paid on death from 6 April 2023 is still being developed, however HMRC has confirmed that any payments that would have been subject to an LTA charge will instead be taxed at the recipient’s marginal rate of income tax.

In practice, the tax rules are far from simple and we strongly recommend that you seek financial advice if you believe you are affected by the tax relief limitations on your pension savings.

The Group Pensions Department is not allowed to give you advice about your personal tax position. It is your responsibility to assess your personal position against the Annual Allowance and it is your responsibility to declare any personal tax charge due on your self-assessment tax returns. We recommend that you get financial advice before making any important decisions about your pension arrangements. You can find information on financial advisers by visiting www.unbiased.co.uk

In addition, HMRC have produced a calculator which you can use to calculate your personal Annual Allowance and if you have a tax charge to pay. This can be found on their web site at www.tax.service.gov.uk/pension-annual-allowance-calculator.