A number of significant changes to pension tax were announced by the Chancellor Jeremy Hunt in the spring Budget, which will affect pension savers and will be welcome news for higher income taxpayers.
The annual allowance is one of three controls on tax relief for pension savings, the others being the annual earnings limit and the lifetime allowance. With effect from 2024–25, the lifetime allowance is to be abolished.
The annual allowance limits the amount of tax-relievable inputs an individual may make in any one tax year to one or more registered pension schemes of which the individual is a member.
When the annual allowance is exceeded (technically, when an individual who is a member of one or more registered pension schemes has a non-zero ‘chargeable amount’), a charge to income tax, known as the annual allowance charge, arises.
A non-zero chargeable amount exists, broadly, when the individual has a ‘total pension-input amount’ that exceeds the individual’s annual allowance for that year (Finance Act 2004, s227(1), 227ZA ). This is known as the ‘default chargeable amount’.
The charge also applies, with modification, in the case of certain non-UK pension schemes.
The amount of the annual allowance for the year 2023–24 has been increased to £60,000 from £40,000.
However, in the case of a high-income individual, the annual allowance is tapered down so it does not fall below a minimum of £10,000 (previously, £4,000).
A high-income individual is an individual whose ‘adjusted income’ for the tax year is more than £260,000 (previously £240,000) and whose ‘threshold income’ for that year is £260,000 minus the annual allowance (in 2023–24, therefore, £200,000, as previously).
For tax years in which or after which the individual first takes advantage of flexible access to benefits, a non-zero chargeable amount (the alternative chargeable amount) may arise if the individual’s money-purchase input sub-total exceeds what is effectively a money-purchase annual allowance (MPAA), which in 2023–24 is £10,000 (previously £4,000).
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