New pension rules explained
Every tax year, on 6 April, your pension allowances refresh, bringing you new opportunities to make the most of pension tax relief.
This year there are even more generous tax breaks on offer, as some major changes to key pension allowances come into force.
Pension and tax rules can change, and benefits depend on your circumstances. Income tax rates and bands are different for Scottish taxpayers.
Lifetime Allowance changes
The lifetime allowance was the total amount that could be built up in your pensions without paying a tax charge. However, since 6 April 2023 the tax charge will no longer apply.
The standard lifetime allowance remains at £1,073,100 and will continue to be measured for the meantime. It is set to be removed entirely from 6 April 2024.
Currently it provides an upper limit to the total maximum tax-free amount you can normally take from your pensions. This limit is £268,275.
If you hold protection against the lifetime allowance, it’s likely you’ll be entitled to a higher tax-free cash amount. In some cases, you may be able to make pension contributions, start a new pension or accumulate new pension benefits without losing your protection benefits (a higher maximum tax-free cash value).
To find out more about how protection is impacted, download our essential lifetime allowance factsheet.
Pension Annual Allowance changes
The annual allowance was increased from £40,000 to £60,000 on 6 April 2023.
This is the maximum amount someone can contribute to a pension each year while still receiving tax relief (including any contributions from an employer). This increase is good news for people looking to significantly boost their pension.
For several years the allowance has been stuck at £40,000, meaning you could pay in £32,000 and the government would add £8,000 in tax relief on top. Now you could pay in up to £48,000 and the government will add £12,000 in tax relief on top. Higher and additional rate taxpayers can claim back up to a further £15,000. To get tax relief, your personal contributions can’t be any higher than your earnings, or £3,600 if this is greater.
If you’re a high earner you could be affected by the tapered annual allowance and your annual allowance could be lower.
Tapered Annual Allowance changes
Previously your annual allowance would have been reduced by £1 for every £2 of adjusted income over £240,000. If you 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. If you have an adjusted income of £360,000 or more your annual allowance will be reduced to only £10,000.
This change means fewer high earners will be impacted by the tapered annual allowance to begin with. And those who are impacted can pay in more each tax year across all their pensions.
Money Purchase Annual Allowance (MPAA) changes
The MPAA was first introduced in 2015. And since 2017, anyone who had flexibly accessed a pension, could only pay in up to £4,000 to their money purchase pensions each tax year, without it trigging a tax charge.
On 6 April 2023, the MPAA rose to £10,000. This benefits anyone looking to build up their pension further after they’ve accessed it. You can now pay in up £8,000 and the government will add 20% in pension tax relief on top. And if you pay tax at a higher rate, you can claim back up to a further 25%.
Remember, to get tax relief, your personal contributions can’t be any higher than your earnings, or £3,600 if this is greater.
To find out more about paying into a pension after retirement, read our article.
Speak to an expert
To get a deeper understanding of how the changes to the lifetime and annual allowances apply to you, you could consider getting help from an expert.
A financial adviser can help you review your pension and tax situation. They’ll also help you understand:
- Whether you could or should increase your pension contributions.
- The effect on any pension protections you may have taken out.
- If and how you could mitigate the effects of the MPAA or tapered annual allowance.
- If you could save tax in other ways such as reducing capital gains tax (CGT).
Your pension toolbox
Now you can pay in up to £60,000 to your pension and benefit from tax relief.
Use our pension calculator to find out what impact this could have on your income in retirement.
Tax relief calculator
You can now get up to £81,000 in pension tax relief.
Use our calculator to find out how much you could be entitled to.
Lifetime allowance guide
If you’re nearing the lifetime allowance (currently £1,073,100), or you already hold lifetime allowance protection, our new guide explains how the rule changes could impact you in more detail.