In the 2023 Spring Budget, Chancellor of the Exchequer, Jeremy Hunt, announced some major changes to pension tax relief which could actually give your employees more of an opportunity to save for later life. This is a refreshing change as more recent history has seen these allowances reduce (both relating to the total amount that a member can accumulate in their pension savings before paying extra tax, and the amount that can be paid in per tax year and receive tax relief.)
Like every Budget, there will be lots of content focussed about this online, on TV and in print – but how does this impact your employees and what can you do to help?
Lifetime Limits to how much members can build up in a pension fund – abolished
Senior employees could have built up large pension funds over their working life and may well have been starting to worry about breaching their Lifetime Allowance. This will no longer be an issue – there will be no Lifetime Allowance charge from 6th April 2023, and the Lifetime Allowance itself will be fully abolished in a future Finance Bill.i
You may well have some senior employees who are now considering larger contributions – perhaps carrying forward unused allowances from previous years.
If you offer the ability to make contributions by salary exchange, this could result in National Insurance savings for the company too – so benefits all round.
Limits to how much members can contribute per tax year and receive tax relief
The “annual allowance” was introduced in 2006, and if members of registered pension schemes breach this, a tax charge is payable.
It has changed many times since it was introduced:ii
An increase of 50% (from £40,000 to £60,000) was announced in the 2023 spring Budget.
This could be a real benefit for employees – allowing those with the affordability to pay more in, make a significantly bigger impact to their projected retirement fund.
You may well have a large number of employees with good levels of pay, who may now consider making larger contributions – perhaps carrying forward unused allowances from previous years.
Again, if you offer the ability to make contributions by salary exchange, this could result in National Insurance savings for the company too.
The Tapered Annual Allowance
The tapered annual allowance was introduced in 2016 – and saw very high earners see their ability to make pension contribution severely restricted – down to £4,000 in some cases. Some changes have been made here as well, and this also affords the opportunity for this group to pay more in too (as it now starts to apply at a higher level of pay – the adjusted income threshold will now be £260,000 rather than £240,000, and the minimum it can go down to will be £10,000).
The Money Purchase Annual Allowance
The Money Purchase annual allowance was introduced in 2015 at £10,000 – and saw people who have started to access their pensions flexibly have a lower allowance. In April 2017, this was further reduced to £4,000iii. When we mention flexible access in this context, we mean using pension products which allow people to access their tax free and taxable pension savings, after the age of 55, without restriction on the size or frequency of withdrawal.
The Spring Budget 2023 saw this increased back to its original level of £10,000. This could see some people who have been restricted to that £4,000 level decide to contribute more, now they are able to without penalty.
What can employers do to help their employees?
The Budget has given us lots of good news around pensions – there are lots of actions that can be taken to help members take advantage of the opportunities provided. These are all focussed around communication – and ensuring that members do what they can. What the last 20 years has shown us is that pension tax relief can be reduced as well as increased without much warning, so taking action when possible is sensible.
