Who is likely to be affected
Individual members of registered pension schemes who make annual pension contributions over the standard annual allowance (AA), money purchase annual allowance (MPAA), or tapered annual allowance (tapered AA), and who therefore expect to become subject to an AA charge.
Individual members of registered pension schemes who already have or expect to have pension savings exceeding either the standard lifetime allowance (LTA) or their protected LTA, and who therefore expect to become subject to an LTA charge.
Scheme administrators of registered pension schemes who will need to modify their processes to accommodate changes to the AA and LTA.
General description of the measure
The AA is the maximum amount of pensions savings an individual can make each year with tax relief without incurring a tax charge which aims to effectively recoup some of the tax relief given. The MPAA is a reduction to the AA for individuals who have flexibly accessed their money purchase pension savings. The tapered AA is a reduction to the AA for individuals with income above set levels. This measure increases the AA from £40,000 to £60,000, and the MPAA and tapered AA from £4,000 to £10,000. It also increases the adjusted income level required for the tapered AA to apply to an individual from £240,000 to £260,000.
The LTA is the maximum amount of tax relievable pension savings an individual can benefit from over the course of their lifetime. Individuals may contribute to their pension over these limits, but they will be subject to a tax charge on the amount above the allowance. The excess is taxed either at 55% where taken as a lump sum, or at 25% where taken as pension. Most individuals are subject to the standard LTA. However, when the LTA was introduced, and each time it has been reduced, protections have been offered to safeguard individuals who had already built-up significant pension savings on the expectation of a certain level of LTA. This measure ensures that nobody will face an LTA charge from April 2023. At a future fiscal event, the government will make the necessary changes to entirely remove the LTA from pensions tax legislation. Consequently, this measure also removes the need for individuals to rely on protections from previous decreases to the LTA.
Individuals may be able to receive to a tax-free lump sum when they become entitled to their pension benefits: a pension commencement lump sum (PCLS). The maximum amount that most individuals can claim as a PCLS is currently 25 per cent of their available LTA at the time this sum is taken. This measure sets a PCLS upper monetary cap of £268,275 (25 per cent of the current LTA). However, those individuals who already have a protected right to take a higher PCLS will continue be able to do so.
For some individuals, lump sums which are tax-free up to the LTA are taxed at 55% on any amount taken above the LTA. This measure ensures that, in such cases, these lump sums are instead taxed at an individual’s marginal rate of income tax.
Policy objective
This measure supports the government’s efforts to encourage inactive individuals to return to work, in particular those aged 50 and above, and it removes incentives to reduce hours or leave the labour market due to pension tax limits. Evidence suggests that recent increases in inactivity have been driven primarily by those aged 50-64, and self-reported retirement has been the main driver for these individuals to leave the labour market. The measure supports individuals’ ability to build up retirement savings and so improves the financial incentive of work whilst continuing to balance the cost of pensions tax relief.
Background to the measure
The AA and LTA were introduced in 2006 as mechanisms for limiting tax-favoured pension savings in registered pension schemes. There is no limit on the tax relief provided but it is recouped by charges when the AA and LTA are exceeded. The original limits were £215,000 for the AA and £1.5m for the LTA.
Since the onset of the pandemic there has been an increase in economic inactivity in the UK – an increase that is larger than for other advanced economies. The government believes that a strong labour market is critical to economic growth in the UK. Within this, encouraging labour market participation, and in turn growing the UK labour market, is a key mechanism to support the economy to produce more and increase GDP.
The government is concerned that the AA and LTA may be acting as disincentives to remain in work. It believes that increases to the AA, MPAA, and tapered AA, alongside removal of the LTA, will help to tackle labour supply issues. The changes to pensions tax relief limits are intended to persuade those currently considering retirement to remain in employment, and to encourage those who have already left the workforce to return.
Detailed proposal
Operative date
The increases to the AA, MPAA, and TAA will have effect on and after 6 April 2023.
The measures to ensure that no-one will face an LTA charge from April 2023 will have effect on and after 6 April 2023.
The new monetary limit on the PCLS will have effect on and after 6 April 2023.
The change in taxation of the LTA excess lump sum, SIHLS, DBLSDB, and UFLSDB will have effect on and after 6 April 2023.
Current law
The current pensions tax rules for registered pension schemes came into force on 6 April 2006 and are set out in Part 4 of the Finance Act 2004 (FA04).
Under sections 227-228, the AA sets a limit on the tax-relieved amount an individual can input to a registered pension scheme in a tax year. Under section 214, the LTA sets a limit on the total tax-relieved pension saving an individual can have over their lifetime.
The AA was set at £215,000 when introduced, but it was increased incrementally to £255,000 by 2010/11. It was then reduced in 2011 and again in 2014 and is now £40,000.
The MPAA was introduced by section 227ZA when pension flexibility was introduced in 2015. It aims to prevent individuals from recycling their money purchase pension savings. It was originally £10,000 and was reduced to its current level of £4,000 in 2017.
The tapered AA was introduced in 2016 by section 228ZA. The original starting point for the taper was £150,000 but rose to its current level of £240,000 in 2020.
Where an individual’s pension savings exceed the AA, MPAA, or tapered AA (whichever they are subject to), section 2777(4) & (4A) provide that the excess savings are taxed at the individual’s marginal rate.
The LTA was set at £1.5m when introduced, but it increased incrementally to £1.8m by 2011/12. The LTA was then reduced in 2012, 2014, and 2016. When frozen in 2016, there was a provision for the LTA to have a CPI-based increase after 2017 to 2018; however, this was switched off in 2021. The current standard LTA, therefore, remains at £1,073,100.
When the LTA was introduced, protections were offered to those who thought that they would be negatively affected. Schedule 36 of FA04 provides primary protection enhanced protection and protections in relation to lump sums that could be taken.
Similarly, each time the LTA has been reduced, protections have been offered to individuals. These were fixed protection (paragraph 14 Schedule 18 to FA 2011), fixed protection 2014 (Part 1 Schedule 22 to FA 2013), individual protection 2014 (Part 1 Schedule 6 to FA 2014), fixed protection 2016 (Parts 1,3 and 4 Schedule 4 to FA 2016), and individual protection 2016 (Part 2 to 4 Schedule 4 to FA 2016).
Where an individual’s pension saving exceeds their LTA, section 215(2) provides that the excess is taxed at either 55% where the excess is taken as a lump sum (the LTA excess lump sum) or 25% where it is taken as pension (assuming that the individual is then taxed at 40% on the income, the overall tax rate would be 55% on that income).
When an individual becomes entitled to their pension benefits under a registered pension scheme, subject to certain limits, the scheme may provide that member with a PCLS. For most individuals the maximum permitted PCLS is 25 per cent of their available LTA at the time the sum is taken (paragraphs 1-3 Schedule 29); however, some individuals have a protected right to take a higher PCLS. Subject to certain further conditions, these individuals include those with primary protection, enhanced protection, scheme-specific lump sum protection (paragraphs 31-34 Sch 36 FA04), stand-alone lump sum protection (SI 2006/572), or fixed protection 2012 (paragraph 14 Schedule 18 FA11), 2014 (paragraph 1 Schedule 22 FA13), or 2016 (parts 1 and 3 Schedule 4 FA16).
The LTA impacts on several other lump sums, each detailed under Schedule 29 to FA 2004. The member must have LTA available for the following lump sums to be authorised payments: pension commencement lump sum (PCLS); serious ill-health lump sum (SIHLS); uncrystallised funds pension lump sum (UFPLS); and winding up lump sum. The following death benefits paid out of uncrystallised funds are also tested against the member’s LTA: defined benefits lump sum death benefit (DBLSDB) and uncrystallised funds lump sum death benefit (UFLSDB). The SIHLS, DBLSDB, and UFLSDB are tax free up to the LTA for those under 75. However, Schedule 29 paragraphs 4, 13, and 15 provide that, for each of these lump sums, any amount above the LTA is taxed at 55%.
Proposed revisions
Legislation will be introduced in Spring Finance Bill 2023 to:
- Increase the AA from £40,000 to £60,000;
- Increase the MPAA from £4,000 to £10,000;
- Increase the income level for the tapered AA to apply from £240,000 to £260,000;
- Ensure that nobody will face an LTA charge from April 2023;
- Limit the maximum an individual can claim as a PCLS to 25% of the current LTA (£268,275), except where protections apply;
- Change the taxation of the LTA excess lump sum, serious ill-health lump sum (SIHLS), defined benefits lump sum death benefit (DBLSDB), and uncrystallised funds lump sum death benefit (UFLSDB), where they are currently subject to a 55% tax charge above the LTA, to taxation at an individual’s marginal rate;
Legislation will be introduced in a future Finance Bill to remove the LTA from pensions tax legislation.
Summary of impacts
Exchequer impact (£m)
LTA: remove charge from April 2023 and abolish from April 2024
| 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 |
|---|---|---|---|---|---|
| — | -135 | -210 | -770 | -800 | -835 |
AA: increase to £60,000 and allow Pension Input Amount aggregation between open and closed public service pension schemes from April 2023
| 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 |
|---|---|---|---|---|---|
| — | -55 | -200 | -270 | -270 | -290 |
Increase MPAA to £10k
| 2022 to 2023 | 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 |
|---|---|---|---|---|---|
| — | -15 | -35 | -40 | -40 | -40 |
These figures are set out in Table 4.1 of Spring Budget 2023 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Budget 2023
Economic impact
This measure will have macroeconomic impacts by increasing employment and labour force participation. In their March 2023 Economic and Fiscal Outlook (EFO), the OBR estimated that changes to the lifetime allowance and the annual allowance on pension contributions will increase employment by around 15,000 in 2027 to 2028, by removing some financial disincentives to continuing in employment for those with large pension pots.
Impact on individuals, households and families
This measure will have a positive impact on individuals saving into a registered pension scheme who are likely to be liable to an AA and/or LTA charge because their pension savings exceed one or both of these limits. This is because increases to the AA, MPAA, and tapered AA will either lift individuals out of scope of the AA or reduce their AA charges. Further, nobody will be face an LTA charge from April 2023.
The measure will also have a positive impact because it will support people back into work or to remain in work, thus helping to improve their funds for retirement. Where individuals work longer, they will be able to save for longer, improving the adequacy of their private pension savings and supporting living standards in later life.
The measure is not expected to have an impact on family formation, stability, or breakdown.
The measure introduces no new or different responsibilities for individuals. Therefore, given that it does not significantly alter how individuals interact with HMRC, customer experience is expected to remain broadly the same. For some customers, experiences of interacting with HMRC and communicating with their pension scheme(s) may improve. Where an individual is lifted out of scope of the AA or had anticipated an LTA charge, this will simplify the Self Assessment (SA) process and may remove the need for them to complete an SA tax return. Moreover, individuals will no longer have to supply information connected to the LTA to their pension scheme administrator, and individuals with LTA protections (made redundant by this measure) will no longer be required to comply with protection conditions.
Equalities impacts
Increases to the AA and LTA will have a greater impact on those later in life and closer to retirement than younger age groups. This is because those earlier in their careers are less likely to exceed the AA and because pension savings are usually only tested against the LTA when an individual begins to draw their pension.
Increases to the MPAA and tapered AA will have a greater impact on older individuals and those in middle income deciles upwards as the MPAA does not normally affect anyone below Normal Minimum Pension Age (NMPA) and the tapered AA only applies to some high-income individuals.
All increases are likely to impact more men than women given that men typically have greater pension savings and will therefore receive greater benefit from any increased pensions tax relief.
It is not anticipated that there will be any particular impact on other groups sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses administering registered pension schemes.
One-off costs could include: familiarisation with revisions to the AA and LTA; training or upskilling of staff as a result of these changes; provision of information and guidance to members; and updates to the pension schemes’ systems to reflect changes to the AA and abolition of the LTA. There are not expected to be any continuing costs.
Continued savings could be seen by those businesses as removal of the LTA will ultimately reduce registered pension schemes’ administrative burden and costs since there will be less reporting and fewer calculations to complete.
Overall, the measure is expected to positively impact businesses’ experiences of engaging with HMRC. This is because removal of the LTA will eliminate the need for registered pension schemes to complete certain tax administration tasks such as including calculating an individual’s available LTA, any LTA charges, and reporting and paying this tax charge.
This measure is not expected to impact civil society organisations.
Operational impact (£m) (HMRC or other)
To support the delivery of this measure, HMRC will need to update its guidance on pensions tax limits. It will also need to amend the AA calculator.
There will be no further additional costs for HMRC to implement and administer this measure as any other operational impacts will be delivered as part of business-as-usual activity.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be kept under review through communication with pension scheme administrators.
Further advice
If you have any questions about this change, please contact the Pensions Policy team in HMRC at email: [email protected].
