The Chancellor announced yesterday (15/03/2023) that the amount of annual contributions paid into pensions before being taxed will increase from £40,000 to £60,000 to incentivise highly skilled employees to remain in the labour market.
In a surprising move, he has scrapped the Lifetime allowance (LTA) completely to remove barriers to remaining in work and to simplify the complexity of pension taxation. Although the LTA has been swept away, the maximum tax free cash that an individual can take will still linked to the current LTA (a maximum of £268,275). It is not clear if these changes are immediate but most likely to be effective from 6 April.
Since the LTA was first introduced, it has led many to retire from their professions early to avoid higher tax burdens when their pensions start. Whilst doctors have been singled out due to the massive impact on the NHS, it applies to many other senior public service employees and earners in the private sector. However the key difference is that the private sector can generally find other ways to remunerate their employees whereas the public sector cannot. The Government needed to find a solution. It is estimated that around 80% of NHS doctors will not receive a tax charge as a result of these new measures in respect of benefits built up under the current NHS Pension Scheme.
Individuals have had the opportunity to protect their savings position. However with protections came restrictions, and in some cases the inability to build up further pension. Will those that have obtained protection and are in receipt of benefits still be restricted or will they also be able to avail themselves of the abolition? And what about those who have been taxed already – HMRC could see its previous position challenged, especially in situations where there were very grey areas surrounding the tax charge. A good example being individuals who stopped paying into pensions but inadvertently triggered a tax burden when drawing benefits as a result of continuing in a group life assurance scheme. As ever the devil will be in the detail.