Since the Spring Budget in March 2023 the UK's pension tax landscape has undergone rapid changes, here we highlight some key changes and impacts of these reforms.

Increased annual allowance and abolition of lifetime allowance

One of the most notable changes the Chancellor made to pensions - effective from April 6 2023 - was to increase the annual allowance and abolish the lifetime allowance to encourage workers over 50 to stay in the workforce. While the lifetime allowance remains for the 2023/24 tax year, the lifetime allowance charge ceased from April 6, 2023, and the allowance itself will be abolished from April 6, 2024, to be replaced by two new allowances.

The increase in the annual allowance from £40,000 to £60,000, along with other adjustments, will benefit taxpayers across income brackets, potentially providing up to £30,000 more compared to the previous tax year. During 2023/24, the lifetime allowance continues to determine certain lump sum benefits, with the tax-free pension commencement lump sum capped at £268,275 for those entitled to the standard lifetime allowance.

Excess benefits charge abolished

Previously, excess benefits over the lifetime allowance were subject to a 55% tax rate, but this charge was abolished from April 6, 2023. However, other tax implications may still apply. Under the new framework, benefits previously subject to the lifetime allowance charge are treated as pension income, effectively reducing the tax rate for additional rate taxpayers from 55% to 45%.

A new framework for pension benefits

The abolition of the lifetime allowance required the introduction of a new framework for pension benefits, focusing on maintaining the 25% tax-free pension commencement lump sum and taxing other benefits at standard income tax rates. New allowances were established, including a lump sum allowance and a lump sum and death benefit allowance, aiming to prevent tax evasion.

The need to adapt quickly

Overall, these reforms represent a significant change in UK pension taxation, aiming to balance retirement savings incentives with tax fairness. However, individuals and pension providers will need to adapt quickly to navigate the complexities of the new system and its implications for retirement planning and taxation.

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