The Budget 2023 and removal of the lifetime allowance

The Spring Budget promised changes to the amount you can save into your pension, an increase in free childcare for some working parents and a continuation of the energy price guarantee for another three months, but I’m going to focus mainly on the pension changes.

Now, the Chancellor announced that, from April 6, people will be able to save more into their pension every year, without facing a tax charge. And that’s because the annual allowance is increasing from £40,000 to £60,000. If you’re in a defined contribution pension, which most workplace pensions are, then this allows includes any money you pay into your pension, any employer contributions and tax relief. If you’re in the type of pension you normally find in the public sector – a defined benefit pension – then the way this allowance is calculated is more complicated.

Now the second Budget announcement on pensions was one that could benefit people who – for example - retire and take money out of their defined contribution pension then go back to work and want to start contributing to their pension once again. Under the rules before the Budget announcement, the most you could pay into your pension in this situation was £4,000 a year. If you contributed more, you’d have to pay a tax charge. But this allowance, called the Money Purchase Annual Allowance, or MPAA, will increase from £4,000 to £10,000 from April 6. 

Now it is important to say that the money purchase annual allowance isn’t triggered in all situations. It doesn’t kick in if – for example - you only take your tax-free cash from your pension or if you use your pension fund to buy an ongoing income in retirement in the form of an annuity. It doesn’t kick in if you put your pension into income drawdown but you don’t take any income from it. Or if you cash in small pension pots worth less than £10,000 each. Now it also doesn't kick in if you take tax-fee cash or income from a defined benefit pension. But the MPAA is triggered if you take income from a larger defined contribution pension, or if you take out lump sums where some or all of the money is taxable.

The last pension announcement I’m going to talk about is the one that attracted the most headlines – and that was the change to the Lifetime Allowance. Now as the name suggests the Lifetime Allowance is a limit on how much you can have saved in all your pensions, without having to pay an extra tax charge when you take money out. Before the Budget announcement it was £1,073,100. In the Budget, the Chancellor announced that the Lifetime Allowance would be abolished, but that this will be done in two stages. So from April 6 this year, the Lifetime Allowance tax charge will be abolished, but the Lifetime Allowance itself will still be in place. But what this actually means is that you will be able to have more than £1,073,100 in your pension plans if you wish, because there will be no Lifetime Allowance tax charge to pay if you take money out. Now at a future date, the Lifetime Allowance will be abolished, subject to legislation.

One last thing to mention is that amount of tax-free cash that you can take from your pensions will be frozen at a rate of 25% of the Lifetime Allowance, which works out at £268,275.

So those are the pension changes, but there were two other big announcements as well. Firstly, the Chancellor said that working parents in England will be able to get 30 hours a week free childcare for children they have from the age of nine months to school age. Now that will be coming in gradually and it won’t be fully implemented until September 2025. Now however, there are different rules in Scotland, Wales, and Northern Ireland, but the Budget did also say there’d be equivalent funding for their childcare schemes. The Chancellor also announced that the energy price guarantee, which had been due to run out at the end of March, will now remain at the same level until the end of June. The guarantee sets a limit on how much you can be charged for gas and electricity. And it works out at £2,500 a year for a typical household paying their bill by direct debit. Now it’s not an absolute cap on how much you’ll pay if you use more or less energy you’ll pay different amounts. There’s another change though from the start of July, people who pay their energy bills by prepayment meter where they normally pay a higher rate than those who pay by direct debit will have that premium abolished. Now that’s good news for the millions of people who do pay their energy bills by prepayment meter.