Budget 2023: Tax-free pension limits raised – here's what it means for your savings
The maximum annual tax-free amount you can save into a pension once you've taken money out of it will rise from £4,000 to £10,000 from 6 April. Meanwhile, the amount you can save into your pension tax-free each year is also set to rise, as is the amount you can save into pensions over a lifetime. The shake-up was announced by the Chancellor Jeremy Hunt in today's Budget.
Watch Martin Lewis's Budget round-up video
You can also watch MoneySavingExpert.com founder Martin Lewis's Budget round-up below; information on pensions can be viewed from six minutes and 13 seconds to eight minutes and three seconds.
In his Budget address, the Chancellor told MPs in the House of Commons that the changes to pensions were to stop "over 80% of NHS doctors from receiving a tax charge" and to incentivise older people to work for longer.
Read our Pension need-to-knows guide for more on how the tax relief currently works.
The amount you can save into pensions you've accessed will rise
Usually, if you start to take money from 'defined contribution' pensions, the amount you can pay back in and still get tax relief on reduces drastically. This is designed to prevent people from earning tax relief twice, which comes at a cost to the Government.
This limit, known as the 'money purchase annual allowance', is currently £4,000 a year, but the Chancellor announced this will rise to £10,000 a year from 6 April 2023. This will apply when you've started to draw an income from your pension via a drawdown plan, or take a taxable lump sum from your pension (technically and horribly called an 'uncrystallised fund pension lump sum'). More info in our Pension need-to-knows guide.
However, there are ways in which you can take money out of your pension and not trigger the money purchase allowance:
- If you take out your 25% tax-free lump sum and use the remainder of your pension savings to buy an annuity.
- If you take out your 25% tax-free lump sum and start a drawdown plan, but don't take an income from it.
- You cash in a 'small pot', which is a pension worth £10,000 or less.
- You take an unlimited amount from a defined benefit, or 'final salary', pension.
If you're thinking of withdrawing money from your pension, or just want general guidance, you can contact MoneyHelper, a government-led advice service, either online or over the phone on 0800 011 3797.
If you've not accessed your pension, you'll be able to put up to £60,000 a year into it tax-free
Currently, the most you can normally save into private pension pots in one tax year before you start paying tax is £40,000. This is known as the 'pensions annual allowance'.
The Government has confirmed that this allowance will rise by £20,000 to £60,000 from 6 April 2023.
You can only receive tax relief on up to 100% of your earnings below the annual threshold. This may include earnings from your wages, taxable benefits or royalties – see the Gov.uk website for a more detailed list. So, if you earn £30,000 a year, that's how much you can pay into your pension each year while still receiving tax relief.
If you're a very high earner, the annual allowance reduces, or 'tapers', though the amount you can earn before the taper applies is being increased, from £240,000 to £260,000. For every £2 you earn above the threshold, your annual allowance reduces by £1 until it reaches a floor of £10,000 (for those with an annual income of £320,000 or more).
For those with 'defined benefit', or 'final salary', pensions, the annual allowance is more complicated, as these pensions are designed to give you a guaranteed income for life. To work out your annual allowance each year, your pension provider has to calculate:
- How much retirement income your pension could have provided at the start of the tax year.
- How much it could provide at the end of the tax year.
- The difference between these two numbers is how much you have contributed to the pension and so comes out of your annual allowance.
If you're not sure how the new allowance will affect you, contact your pension provider for help.
You'll now get tax relief on your pension even if you already have a large pot
There is currently a limit on how much you can build up in pension benefits over your lifetime, while still enjoying the full tax benefits. This limit is known as the 'lifetime allowance' (LTA).
The LTA is currently £1,073,100 and was supposed to be frozen at this level until the 2025/26 tax year.
However, the Government has now said the LTA will be completely abolished from 6 April 2024, meaning there will be no cap on how much you can build up in pension benefits while continuing to get tax relief.
The separate 'lifetime allowance charge' will be scrapped from 6 April 2023. This currently sees a 55% fee applied to any amount taken as a lump sum above £1,073,100, or 25% is charged if you take any amount above the lifetime allowance as income.
Despite this, the amount you can take as a tax-free lump sum will be capped – at £268,275. This is the maximum you can get under the current LTA of £1,073,100.