Budget changes to annual allowance and lifetime allowance

The Chancellor has announced his Spring Budget 2023 which includes some welcome news for pensions. How will changes to the annual allowance and lifetime allowance affect members of the NHS pension scheme?

Annual allowance changes

As a recap, previously, members of a pension scheme were only able to get tax relief on pension contributions up to a maximum limit of £40,000, or where total taxable income was in excess of £200,000. The minimum tapered annual allowance was £4,000.

For members of the NHS pension scheme, the allowance is not compared to contributions, but to the growth in your pension benefits in any given year, known as “pension inputs”.  Pension benefits are linked to pensionable pay, which can make it quite difficult to predict what’s likely to happen.

Following the results of the government consultation whereby they’ve removed the inflation element within pension growth calculations (see the blog published by Lizzy Lloyd here), the Chancellor has announced that the standard allowance will increase from £40,000 to £60,000 with effect from 6 April 2023.

The minimum tapered annual allowance has also been increased from £4,000 to £10,000.

As part of the calculations for determining the available allowance, pension inputs are added to taxable income, and if this “adjusted threshold” is more than £240,000, the allowance is tapered by £1 for every £2 excess. The Budget also states this adjusted threshold limit will be increased to £260,000, reducing the potential for having a tapered allowance.

Lifetime allowance changes

On retirement, the capital value of a member’s pension pot is compared to their available lifetime allowance, with any excess taxed at 25%. This tax charge was paid by NHS Pensions to HMRC, with members having a reduction to their annual benefits to recoup the charge.

The current limit is £1.07m and has been frozen for several years, so members of the 1995 scheme with a pension of more than £46,522 potentially could have faced a tax charge.

As part of the Budget, the Government will remove the lifetime allowance charge from 6 April 2023, before fully abolishing the lifetime allowance in future legislation, so there is no limit on the value that can be built up in any pension funds.

On retirement, members of the 1995 scheme receive a tax-free lump sum of three times their pension. This figure can be increased, with the maximum tax-free lump sum being 25% of the lifetime allowance.  As the lifetime allowance is being abolished, the maximum tax-free lump sum will remain at its current level of £268,275, and will be frozen hereafter.

Any lump sum drawn above this amount will be subject to a 55% tax charge.

For those members who had opted out of the scheme, these announced changes may be prompting you to consider opting back in. Before doing so, we would encourage you to get in touch with your usual contact to discuss the relevant implications, particularly the catch-up dynamisation during the period you were out of the scheme.

Need help?

If you would like help with any of the issues discussed above, please get in touch with our specialist Medical accounting team. Call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Louise Dean