Pension Rules

2025

Scottish income tax threshold changes

From 6 April 2025 the basic and intermediate rate tax thresholds will change as displayed below.

New Scottish income tax rates and bands

*Assumes individuals are in receipt of the standard personal allowance.

**Those earning more than £100,000 will see their personal allowance reduced by £1 for every £2 earned over £100,000.

Source: Scottish Budget 2025-26, Scottish Government, www.gov.scot, 04/12/2024.

2024

3 new allowances to replace the lifetime allowance

There used to be a limit to the total value of pension benefits you could build up throughout your lifetime and generally receive up to 25% tax free. This limit was known as the lifetime allowance and was set at £1,073,100 for most people. However, from 6 April 2024, the lifetime allowance was abolished and replaced with three new allowances. These are the lump sum allowance, the lump sum and death benefit allowance, and the overseas transfer allowance.

• The lump sum allowance normally provides an upper limit to the tax-free amount of certain lump sums that can be taken across an individual’s pensions. This allowance is £268,275 for most people. Payments that use up this allowance include pension commencement lump sums (PCLS) and the tax-free element of uncrystallised funds pension lump sums (UFPLS).
• The lump sum and death benefit allowance applies to payments that use up the lump sum allowance as well as the tax-free element of serious ill health lump sums and certain non-taxable lump sum death benefits. For most people, this allowance will be £1,073,100.
• The overseas transfer allowance provides a limit on transfers to Qualifying Recognised Overseas Pension Schemes (QROPS). This allowance is £1,073,100 for most people. Any value that exceeds this allowance will normally be subject to the Overseas Transfer Charge (OTC).

Find out more about the new allowances, including how you may be affected if you used lifetime allowance under the previous rules.

Scottish income tax and pension tax relief changes

The Scottish government introduced a new ‘Advance tax rate’ of 45% for any Scottish taxpayer earning between £75,001 - £125,140. They also increased the Top rate tax band to 48%. Take a look at the table below. These changes are reflected in how much tax relief you could claim back. Now you can claim back up to an extra 25% or 28% in tax relief when you add money to a pension. But be aware you need to pay tax at the sufficient rate of either 45% or 48%.

2023

Lifetime allowance changes

The lifetime allowance was the total you could accumulate in your pensions without paying a lifetime allowance tax charge, however the lifetime allowance tax charge was removed from 6 April 2023. Currently it provides an upper limit to the maximum tax-free amount an individual can typically take across all their pensions. The standard lifetime allowance is currently £1,073,100 but is set to be removed from 6 April 2024.

You’ll normally be able to take up to 25% of your pensions tax-free (usually up to a limit of £268,275). Some individuals with lifetime allowance protection may be able to take a higher tax-free amount.

Annual allowance increased

The amount of money that can be added to pensions each year was increased to £60,000. For high earners, your annual allowance could be lower.

Money Purchase Annual Allowance (MPAA) increased

The MPAA was first introduced in 2015. Since 2017, anyone who had flexibly accessed a pension could only contribute up to £4,000 to their money purchase pensions each tax year without incurring a tax charge. From 6 April 2023, the MPAA rose to £10,000.

Tapered Annual Allowance changes

Previously your annual allowance would have been reduced by £1 for every £2 of adjusted income over £240,000. For those who had an adjusted income of £312,000 or more your annual allowance would have been reduced to £4,000.

From 6 April 2023, your annual allowance will reduce by £1 for every £2 of adjusted income over £260,000. For those with an adjusted income of £360,000 or more your annual allowance will be reduced to £10,000.

Scottish income tax and pension tax relief changes

From 6 April 2023, the higher and top Scottish tax bands and rates changed. Take a look at the table below. This means those with earnings above £43,663 could receive up to 42% in pension tax relief on their contributions. For anyone with earnings of more than £125,140, you could receive up to 47% in pension tax relief.

The table sets out the position for individuals with a standard Personal Allowance. Certain limits apply to tax relief.

UK income tax band changes

From 6 April 2023, the additional rate tax band reduced from £150,000 to £125,140.

2021

State Pension triple lock suspended

State Pension increases are normally based on the triple lock rule. This means State Pension income rises by the greater of wage growth, inflation (CPI), or 2.5% each year. On Tuesday 7 September, the Government confirmed plans to suspend this rule for one year. This means the State Pension will only rise by the greater of inflation or 2.5%. Inflation (CPI) rose 3.1% in the 12 months to September 2021, therefore State Pension income will rise by this amount from April 2022.

Lifetime allowance freeze

The lifetime allowance (LTA) usually rises in line with inflation each year. However during the Autumn Budget, the chancellor confirmed it will be frozen at £1,073,100 until April 2026.

2020

Lifetime allowance increased

The lifetime allowance increased in line with inflation from £1,055,000 to £1,073,100 on 6 April 2020.

Annual allowance for high earners reduced further, but earnings thresholds increased

With effect from 6 April, the amount of money you could add to your pension each year was reduced further if you’re a high earner, but the earning limits for when this applies was increased. This is because of changes made to the tapered annual allowance rules.

The ‘threshold income’ limit was increased to £200,000 (up from £110,000) and ‘adjusted income’ limit to £240,000 (up from £150,000). This means if you have an adjusted income over £240,000 you could see your annual allowance reduced. The minimum annual allowance has been reduced to just £4,000 if you have adjusted income of £312,000 or more.

2019

Lifetime allowance increased

The lifetime allowance increased in line with inflation from £1.055 million on 6 April 2019.

2018

Scottish income tax introduced

There are now five tax bands for Scottish taxpayers. This affects the amount of tax relief some Scottish taxpayers are able to claim.

Lifetime allowance increased

The lifetime allowance increased in line with inflation from £1 million to £1.03 million on 6 April 2018.

2017

Money purchase annual allowance reduced

The ‘money purchase annual allowance’ for pension contributions was reduced from £10,000 to £4,000.

If you’ve flexibly accessed your pension since 5 April 2015 or have been in flexible drawdown since before 6 April 2015, you might be affected.

2016

Annual allowance reduced

The amount of money you could add to your pension each year was reduced for high earners. For most people the limit is still £40,000, but this change means it could be as low as £10,000 for some people.

Lifetime allowance reduced

The lifetime allowance was also lowered from £1.25 million to £1 million.

2015

Money purchase annual allowance introduced

The money purchase annual allowance (MPAA) was first introduced in 2015. It means anyone who has flexibly accessed a pension can only contribute up to £10,000 to their pension in that tax year. From 6 April 2017, the MPAA dropped to £4,000.

Pension freedoms introduced

In 2015 the government made sweeping changes so that pensions could be more flexible and accessible. The 2015 changes are sometimes called the ‘pension freedoms’, and you can take advantage of all of them with the HL Self-Invested Personal Pension (SIPP).

More flexibility

You now have more choice when it comes to taking money from your pension. From your 55th birthday (57th from 2028), you can:

• Take your whole pension out in one go - 25% will normally be tax free and the rest taxed as income
• Take smaller lump sums as and when you like - 25% of each withdrawal is normally tax free and the rest taxed as income
• Take up to 25% tax free and a regular taxable income from the rest (via an annuity or drawdown)

You can also take your tax-free cash straight away and your taxable income via drawdown at a later date. Please remember that your pension may need to last you throughout your retirement and tax benefits depend on your circumstances.

Pass your pension on tax free

If you die before 75, your loved ones can now receive money from your pension tax free. If you die after 75, any withdrawals they make will be taxed as income. There’s more information on this page: What happens to your pension when you die?

Tax cuts for spouses and partners

If you die before you’re 75 and you have a lifetime annuity, your spouse or partner will no longer have to pay UK income tax on it. A joint-life or dependant’s annuity can now be paid to anyone after you die, subject to any restrictions from your annuity provider.