Changes to how pensions are taxed from April 2023 and what it means for you

The total amount that can go into all of your pensions each year without paying extra tax, is called the annual allowance. This has increased from £40,000 to £60,000 a year.

If you build up pension savings in a defined contribution (DC) pension, like the Quilter Collective Retirement Account, the amount counted against your annual allowance is based on how much money you and your employer put into your pension. 

If you build up benefits in a defined benefit (DB) pension, the amount counted against your annual allowance is based on how much the value of your pension increases over the year.  Your defined benefit pension scheme will be able to tell you how much this is, or you could speak to your financial adviser.

The limit on how much you can have in your pension over your lifetime is known as the lifetime allowance. The lifetime allowance is £1,073,100. From April 2023, there’s no extra tax charge for exceeding the lifetime allowance however much you have in your pension. While the lifetime allowance isn’t officially abolished until April 2024, no one will have to pay a lifetime allowance charge for the tax year 2023-2024. There used to be a 55% tax charge on pension savings above the lifetime allowance, this has now been removed and instead money above the lifetime allowance is subject to income tax at your marginal rate.

When you reach age 55 you can take up to 25% of your pension as TFC with an upper limit of 25% of your remaining lifetime allowance. Going forward, this means that if you have never taken tax-free cash before and you have no lifetime allowance protection, the maximum amount you can take as tax-free cash will be frozen at £268,275. Any cash that you take from your pension after that will be taxed as income. If the value of all of your pensions combined is worth more than £1,073,100 this might affect you.

If you’ve already started taking money from your defined contribution (DC) pension, like the Quilter Collective Retirement Account, you can now save up to £10,000 a year into another DC pension. Once you reach £10,000, you’ll start paying tax on the money that you save. Before April this amount was £4,000. This is particularly relevant for you if you are already using some of your pension savings but continuing to work and save into a different pension.

If you are a very high earner, your annual allowance will be reduced. This is known as the ‘tapered annual allowance’.  Before April the tapered annual allowance applied to anyone with total taxable earnings above £240,000. This has now gone up to £260,000.  The tapered annual allowance means that for every £2 of total taxable earnings above £260,000, your annual allowance will be reduced by £1, reducing your annual allowance down to a minimum of £10,000. Anyone who thinks they may be impacted by this should seek financial advice as this is a particularly complex area.