The Chancellor announced the relaxation of three different pension allowances to encourage older taxpayers to remain an active part of the workforce or to return to employment if they have retired early.
The pensions annual allowance provides a cap on the total contributions a taxpayer and their employer can pay into the individual’s pension fund in a tax year without triggering a tax charge. This cap can catch individuals who belong to final salary pension schemes as the annual allowance is measured against the growth in the fund, subject to a complicated formula, rather than amounts paid in.
This annual allowance, which has been frozen at £40,000 for the last nine years, will increase to £60,000 on 6 April 2023. It will still be possible to carry forward unused annual allowance for three tax years.
Taxpayers with adjusted net income in excess of £200,000 per year and income including all pension contributions of over £240,000 have their annual allowance tapered down by £1 for every £2 of income over the higher figure down to a minimum of £4,000. That income threshold rises to £260,000 and the minimum value for the tapered annual allowance increases to £10,000, both from 6 April 2023.
Individuals who have retired early and have drawn some of their taxed pension benefits from a money purchase pension scheme are subject to a money purchase annual allowance (MPAA) of £4,000. This means that if the taxpayer and their employer contribute more than £4,000 per year to the taxpayer’s pension fund a tax charge will apply at the taxpayer’s marginal rate.
The MPAA cap was previously set at £10,000 per year until 2016-17 and the Chancellor has restored it to that level from 2023-24.