Pension threshold changes and how to make the most of them

Back in 2023 when Chancellor Jeremy Hunt delivered his Spring Budget. While there was quite a lot of bad news among his announcements – including the commitment to stick to the Corporation Tax rise – there was good news in the form of pension changes. In this post, we’re going to take a closer look at th0se pension changes, what they mean and how you can make the most of them.

Pension change 1 – the lifetime allowance

The most significant pension change involved the pensions lifetime allowance. Before the Budget, you were allowed to have a tax-free pension pot of up to £1,073,100. If you saved any more than that, you had to pay tax of up to 55% on the excess.

Jeremy Hunt argued that the lifetime allowance gave essential workers such as doctors the incentive to retire earlier. As a result, he abolished the lifetime allowance altogether. From now, whatever size your final pension pot, you don’t pay tax on what it contains.

Pension change 2 – the annual allowance

The second pension change concerned the annual allowance. Beforehand, you were allowed to put up to £40,000 into your pension each year without paying tax. This was bumped up to £60,000. Any contributions by you or your employer under this amount attract tax relief. For a basic rate taxpayer, this means HMRC adds £25 to their pension for every £100 they put in.

Pension change 3 – the money purchase annual allowance

The money purchase annual allowance is a limit on how much over-55s can pay into their pension with tax reliefs after they have started taking an income from their pension pot. This used to be £4,000 was raised to £10,000. The idea was to help people currently struggling with the cost of living, while making it easier for them to rebuild their pensions in the future.

Staying the same – tax-free lump sums

Although the lifetime allowance is now limitless, the maximum tax-free lump sum you can take from your pension remains the same. This was originally set at 25% of the lifetime allowance – £268,275. However, you will still only be able to take a maximum of £268,275, not 25%, even if your pension pot holds more than £1,073,100.

How to make the most of the pension changes

The key point of the pension changes is that you can now put more money into your pot tax free. If you own a limited company, this means you can use employer pension contributions to extract profits in a tax-efficient way.

This is because an employer contribution is an allowable business expense, meaning you get tax relief against corporation tax. This can be a game changer if your company profits are over £50,000. Since April 2023, corporation tax has been charged at a tapered effective rate of between 19% on firms with profits of up to £50,000 and 25% for those with profits over £250,000. As a result, paying £60,000 into a pension pot could bring down the rate of corporation tax you pay.

To give an example, if you made a profit of £100,000 you’d normally pay a marginal rate of 19% on the first £50,000 and 26.5% on the next £50,000. This would give you a corporation tax bill of £22,750.

However, if you paid £60,000 of the profits into a pension, you’d only have to pay corporation tax on the remaining £40,000. This would mean a much smaller bill of £7,600.

Can you help me make tax savings?

If you’d like advice on how to use your pension to make tax savings, one of our accountants would be delighted to advise you. Simply use the form below to get in touch or call us today on 0800 6520 025.