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A few years ago, the UK’s fiscal event schedule was geared around a Spring Statement and an Autumn Budget.
This made sense. After all, the intention of the Budget is to announce new tax measures, and time has to be given to put them into practice for the start of the new tax year.
However, it now appears this careful timetable has been thrown out of the window. Over the past year we have had a Spring Statement in March 2022, a “mini” Budget in September, an Autumn Statement in November, and then we had a Spring Budget last month.
The “rabbit out of the hat” for the Spring Budget was the abolishment of the lifetime allowance, starting with the removal of the LTA tax charge next year, and the restriction of tax-free cash to £268,275 for those who did not already have protection.
HM Revenue & Customs and the industry have only three weeks to incorporate these new rules. So, it is understandable why both are frantically trying to nail down exactly how the new pension tax regime will work in 2023–24.
This article discusses a key area where we have recently got more information — how protected tax-free cash will work in the new regime.
The new pension tax rules
The LTA charge will be removed from April 6 2023, with the intention that the LTA itself be abolished from April 2024. However, the amount of tax-free cash an individual can take over their lifetime will be kept frozen at the current level of £268,275 (25 per cent of today’s standard LTA of £1,073,100).
Because a framework will be needed to monitor how much tax-free cash is taken, pension schemes still have to carry out tests at benefit crystallisation events. This includes asking members for information on how much LTA they have previously used up and giving them the details of how much LTA they used on this occasion.
This may seem nonsensical to pension scheme members, but for the time being it remains an important part of the pension tax framework.
Other immediate changes are the rise in the annual allowance to £60,000, as well as the increase in the money purchase annual allowance to £10,000 (for all those who have ever triggered the MPAA), and a new minimum tapered annual allowance of £10,000.
Protected tax-free cash
One important announcement on Budget day was that despite the restriction of tax-free cash to £268,275, if an individual had previously protected a higher amount of tax-free cash, they would get to keep this higher entitlement.
And in a generous addition, HMRC also confirmed that those who already hold enhanced or fixed protection would be able to restart building up their pension again from April 6 2023, without losing their protected tax-free cash entitlement.
