Treasury changes to pension

Posted by jonathanfullarton - August 24, 2023 8:59 am Spring Budget 2023 – Pension Reforms

Guest article written by Ian Avery, BSc (Hons), DipPF, Wealth Management Consultant, Mattioli Woods

For details and contact information for Ian and Mattioli Woods, please view the bio below.


Following several years of relative calm in the pensions industry, the 2023 Budget surprised everyone with arguably the most significant reforms in pension legislation since the current rules were introduced in April 2006. The aim of the changes was to encourage the over 50s back into work and to incentivise highly skilled individuals (specifically senior NHS clinicians) to remain in the work force for longer, by improving the tax efficiency of pension saving. As you would expect in the modern world, they could not target the two groups highlighted directly and therefore reforms to all pension legislation have been proposed that will positively impact most individuals actively saving for retirement.

The changes revolve around two key concepts, the Annual Allowance and the Lifetime Allowance, with the former designed to control and limit the amount of pension contributions that receive tax relief, and the latter designed to limit the amount of tax-incentivised savings that can be built up in a person’s lifetime.

The Annual Allowance

As you would expect from the overly complex world of pension legislation, there are three separate annual allowances that can apply to an individual, all of which have been changed for the positive in the recent Budget. The three allowances and the changes announced by the Chancellor are summarised as follows:

  1. The standard annual allowance – the maximum amount of pension savings individuals can make each tax year with the benefit of tax relief. This includes pension savings that individuals make, plus any made by someone else on their behalf such as their employer. The allowance has been around since 2006 and has reduced since its introduction. However, with effect from April 2023, this has been increased from £40,000 per tax year to £60,000 per tax year. It will also still be possible to use any unused annual allowance from the three previous tax years, using carry forward provisions, as has been the case since April 2011.
  2. The money purchase annual allowance (MPAA) – the maximum amount of pension savings that individuals who have flexibly accessed their pension (either by taking a taxable income via drawdown or fully encashing a pension with a value over £10,000) can make each tax year to a money purchase scheme with the benefit of tax relief. This again includes all pension contributions paid by, or on behalf of, an individual. This allowance has been around since pension freedoms were introduced in 2015 with the sole intention of preventing those in retirement recycling their drawn pension back into a pension. The limit was originally £10,000 when the allowance was introduced but was reduced to £4,000. With effect from April 2023 however, this has been increased to the previous level of £10,000 per tax year. Unlike the standard annual allowance, carry forward of unused annual allowance is not available if you are subject to the MPAA.
  3. The tapered annual allowance – a reduced annual allowance that applies to anyone deemed by HMRC to be a ‘high earner’. Since 2020, anyone who had threshold income (all income reported on a tax return less personal contributions made) of over £200,000 per annum and an adjusted income (all income plus all employer pension contributions) of more than £240,000 per annum, saw their annual allowance reduced by £1 for every £2 over the adjusted income limit of £240,000, down to a minimum allowance of £4,000 per annum. The Budget announcement moves the adjusted income figure from £240,000 to £260,000 and the minimum amount that the standard annual allowance can be tapered to has increased to £10,000 per annum.

The Lifetime Allowance  

The Lifetime Allowance was introduced in 2006 as a cap on the amount of savings an individual can accrue in pensions throughout their lifetime. The original limit was £1.5 million back in 2006, rising to £1.8 million by 2011/2012 and reducing back down to the current limit of £1,073,100.

Tests against the Lifetime Allowance limit are triggered when drawing retirement benefits (tax free lump sum withdrawals and pension), on death under age 75 if there are benefits that have not yet been accessed, and a final test at age 75 that looks at untested benefits, and the growth on previously accessed benefits. If at any of these test points an individual is over their Lifetime Allowance, they could be subject to a 25% tax charge on the excess over the limit. With effect from April 2023, the tax charge has been reduced to 0% however, certain lump sum payments over and above the Lifetime Allowance will be subject to income tax at the individual’s marginal rate. From April 2024, the proposal is that the Lifetime Allowance will be abolished in its entirety, although this will not be legislated for until the Finance Bill 2024.

As a result of the changes to the Lifetime Allowance, the maximum amount that a member can take as a pension commencement lump sum (PCLS) or tax-free cash will now be frozen at £268,275 (this being 25% of the current Lifetime Allowance of £1,073,100). Individuals with a protected right to a higher PCLS will continue to be able to access this right, though certain conditions apply. Protected amounts have in the past been removed for anyone who contributes to their pension arrangements following the granting of the protection. The Government has therefore announced that anyone with a valid enhanced protection or any valid fixed protections, where this protection was applied for before 15 March 2023 (the day of the Budget), will be able to accrue new pension benefits, join new arrangements or transfer without losing this protection, though there continues to be uncertainty over the changes due to come into force in 2024.

As mentioned, tax charges will still be retained for lump sum payments from pensions, including serious ill health lump sums, uncrystallised funds lump sum death benefits, defined benefits lump sum death benefits and Lifetime Allowance excess lump sums, although the tax charge will be reduced from 55% to the recipient’s marginal income tax rate.


Pensions have always been a tax-efficient way of saving for retirement given the tax breaks afforded to them, which include income tax relief at an individual’s highest tax rate, the option of corporation tax relief on employer contributions, income tax free and capital gains tax free growth within the pension wrapper, and the expectation that a pension should not form part of your estate for inheritance tax purposes on death. By increasing the amount that can be put into pensions and removing the amount that can be built up within them simply strengthens the already compelling argument for investing into pensions.

All taxpayers should take note and consider a review of their retirement planning in light of the changes to ensure they are fully using these valuable reliefs while they are available. The fact that most people can expect to pay more tax because of the freezing of the income tax allowances and reduction of the additional rate tax threshold only further enhances the need for review of retirement plans. As should anyone who has previously retired but has now gone back to work and could be missing out on valuable employer contributions into a pension. Anyone who has been caught by the reduction in the additional rate income tax band may want to think about boosting contributions, as should any individual who has ceased contributions or refused their employer’s contributions due to concerns over going over the Lifetime Allowance limit.

Equally anyone who has applied for and holds any form of Lifetime Allowance protection may also want to review their plans given that they too can consider boosting contributions if they want to, without losing their protection.

Business owners should also consider the remuneration structures they use in light of the changes, especially with corporation tax rates having increased. Pension contributions for employees, including directors who meet the ‘wholly and exclusively for the purpose of business’ test, should be 100% relievable against corporation tax rates. This means in practice that a £60,000 contribution made by a company for a shareholding director should reduce the company’s taxable profits by £60,000, therefore providing corporation tax relief of £15,000 to the company.

As ever, there are complexities as to how much can be paid and by whom, and professional advice from your accountant and financial advisers should be sought to help navigate those complexities.


HMRC Pensions Tax Relief Manual extracts:



HM Treasury Spring Budget 2023