Rumours of pension changes in the October budget
Changes to pension tax relief seems to be top of the list of possible changes in the Budget and could yield more tax revenues than changes to CGT and IHT combined. As recently as 6 April 2023, we saw the abolition of the lifetime allowance charge and a significant increase in the pension annual allowance to £60,000 a year, which Rachel Reeves commented were too generous, so we may see those changes reversed or curtailed.
Possible changes to pensions to listen out for include:
- Limiting pension tax relief for individuals to basic rate or possibly a 30% flat rate;
- Further limiting (or abolishing) the 25% tax free lump sum;
- Freezing or reducing the £1,073,100 lump sum and death benefit allowance;
- Making the undrawn pension fund subject to inheritance tax; and
- Limiting the amount of employer pension contributions that can be paid by way of a salary sacrifice.
Pension changes normally take effect from the start of the tax year on 6 April, however there have been mid-year changes in the past. Taxpayers should therefore consider bringing forward pension planning just in case changes are effective from the date of the announcement.
Many over 55’s can withdraw 25% of their pension fund tax-free
Under current pension rules, many pension funds allow pension scheme members to withdraw up to 25% of their pension savings tax-free. Finance Act 2023 limited the tax-free amount to £268,275 unless the individual had applied for protection at a higher amount. There are rumors that the tax-free amount may be further limited, with an amount of £100,000 suggested, and this has resulted in significant withdrawals from pension funds in recent weeks. It should be noted that there are anti-avoidance rules that limit the amount that can be reinvested in the pension fund within a 12 month period.
Pension lump sum “recycling” is countered by anti-avoidance rules where the lump sum withdrawn is more than £7,500 during a one year period and subsequent pension contributions are increased by more than 30% of the lump sum. A breach of this rule will mean that the lump sum is an unauthorised payment and will be taxed at 40%.
