Following the announcement of the Spring Budget on 15 March, some of the biggest changes affect new pension legislation and allowances. These changes are set to have a significant, positive impact on high-earning clients and their pensions.
Here’s what you need to know about changes to your clients’ pension allowance and what you can do to help them make the most of the new legislations.
New lifetime pension allowances
One of the biggest changes to pensions following the 2023 Spring Budget announcement on 15 March is the news that the pensions lifetime allowance (LTA) is to be scrapped.
Previously, the LTA was set at £1,073,100, meaning anyone saving more than this would be taxed up to 55% on pension savings exceeding this amount.
According to new pension allowances, from 6 April 2023, there will be no government limit on the amount people can save tax-free over their lifetime. This will significantly benefit higher-earning clients, enabling them to increase their pension investments without being penalised for exceeding a set limit.
If you have higher-earning clients whose circumstances allow for an increase in pension contributions, or older clients who wish to continue work in a high-salary position, now is the perfect time for them to make the most of these tax-free investments.
New annual pension allowances
Another significant change to pension allowances following the 2023 Spring Budget is the increase in the annual tax-free allowance. Previously set at £40,000, the government has increased this by 50% to a £60,000 allowance within a single tax year.
This is set to include contributions made by individuals and their employers. It will mean that basic-rate tax payers will be able to claim the 25% top-up on eligible contributions up to the value of £60,000.
Alongside the main allowance, the minimum amount of the tapered annual allowance will also increase from £4,000 to £10,000 from 6 April 2023. The adjusted income figure will also be uprated from £240,000 to £260,000. This means that high-earning clients with a threshold income of more than £200,000 and adjusted income of £360,000 or more will have a tapered annual allowance of £10,000 in 2023/24.
Any high-earning clients whose circumstances would allow for an increase in their annual pension contributions should think about making the most of this tax-free opportunity.
Money purchase annual allowance
Changes to the money purchase annual allowance (MPAA) will affect older clients who are currently accessing their pensions before retirement while still paying into it.
The MPAA is a limit on the amount people over 55 can contribute to a defined contribution pension with tax reliefs, once they start drawing on it. The previous MPAA was set at £4,000, but has now been increased to £10,000. This will benefit those clients wishing to rebuild their pension if they’ve been forced to draw on it prematurely.
With the recently announced budget changes, now is the perfect time to encourage higher-earning clients to reassess their pension contributions to maximise the tax-free benefits of the new legislations.
For more ways to help clients maximise their pension investments, contact CTT Private Client.